Evaluating household expenditures and their relationship with house prices at the microeconomic level

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Mark Smith
Over much of the past 40 years, cycles of house price and consumption growth have been closely synchronised in New Zealand. Three main hypotheses for this co-movement have been proposed in the literature. Firstly, an increase in house prices increase homeowners wealth, which increases their desired level of expenditure. Secondly, rising house prices may also facilitate additional consumption by reducing credit constraints to homeowners. Finally, house prices and consumption have been influenced by common factors, including expectations of future income growth. This paper uses repeated cross sectional analysis of household level data over the 1984 to 2007 period to ascertain which of these hypotheses is more valid for the New Zealand case. A positive correlation between real house prices and real household expenditures is evident for most tenure and age groupings. However, findings from this paper suggest that the house price and consumption relation is predominantly driven by wealth effects.