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Booms and busts: consumption, house prices and expectations

Attanasio, O.P.; Blow, L.; Hamilton, R.; Leicester, A.; (2005) Booms and busts: consumption, house prices and expectations. (IFS Working Papers W05/24). Institute for Fiscal Studies: London, UK. Green open access

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Abstract

Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households’ wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, which appears to contradict the wealth channel. These findings therefore suggest that common causality has been the most important factor behind the link between house price and consumption.

Type: Working / discussion paper
Title: Booms and busts: consumption, house prices and expectations
Open access status: An open access version is available from UCL Discovery
Publisher version: http://dx.doi.org/10.1920/wp.ifs.2005.0524
Language: English
Keywords: JEL Classification: C13, D10, D91, E21. House prices, consumption booms, wealth effects, collateral effects, common causality
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/2708
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