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House prices and consumer spending

Summary

Project Number: 60360
Research Theme: Home_ownership
Project Leader: Yates, Judith
Funding Year: 2007
Research Centre: Sydney

Research & Policy Bulletin

Issue 117: Does higher housing wealth increase consumer spending?

On average, every $100 000 increase in housing wealth results in an increase in consumption of $1000 to $1500 per annum in Australia. Increased housing wealth helps to relax borrowing constraints on home owners thus facilitating increased consumption.

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Description

To estimate consumption over the life-cycle, the study used data from six Household Expenditure Surveys from 1975-6 to 2003-04. The wealth data available in the 1998-99 and 2003-04 surveys are included in the analysis to examine the impact of unanticipated increases in housing wealth.

The key findings of the research are:

• Housing booms add to economic growth through increased household consumption. Every 5 per cent increase in the median value of dwellings in Australia represents an increase in total average household consumption of 0.3 to 0.45 per cent, or an increase in Gross Domestic Product (GDP) of 0.2 to 0.3 per cent.
• The estimated consumption response to the increases in housing wealth was greatest for middle-aged home-owners compared with those in other age cohorts.
• This is consistent with the hypothesis that the higher consumption resulting from increases in housing wealth arises from the relaxation of a credit or collateral constraint that enables households to increase their borrowing in order to finance consumption.
• This study will assist macroeconomic policy makers such as the Reserve Bank and the Federal Government in predicting trends in the economy as well as understand the ways governments might be able to moderate the impact of the housing market on the economy.
  

More Information

Final Report: No. 132: Housing wealth and consumer spending
777 KB PDF Document

Research and Policy Bulletin: Issue 117: Does higher housing wealth increase consumer spending?
476 KB PDF Document