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Homeowners Do Not Increase Consumption Despite Their Property Rising In Value, Research Shows

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Although the value of our property might rise, we do not on that account increase our consumption. This is the conclusion by economists from University of Copenhagen and University of Oxford in new research which is contrary to the widely believed assumption amongst economists that if there occurs a rise in house prices then a natural rise in consumption will follow. The results of the study is published in the scientific journal The Economic Journal.

"We argue that leading economists should not wholly be focussed on monitoring the housing market. Economists are closely watching the developments on the housing market with the expectation that house prices and household consumption tend to move in tandem, but this is not necessarily the case," says Professor of Economics at University of Copenhagen, Søren Leth-Petersen.

Søren Leth-Petersen has, alongside Professor Martin Browning from University of Oxford and Associate Professor Mette Gørtz from University of Copenhagen, tested this widespread assumption of 'wealth effect' and concluded that the theory has no significant effect.

Homeowners do not increase their consumption

Søren Leth-Petersen explains that when economists use the theory of 'wealth effect' the presumption is that older homeowners will adjust their consumption the most when house prices change whilst younger homeowners will adjust their consumption the least. However, according to this research, most homeowners do not feel richer in line with the rise of housing wealth.

"Our research shows that homeowners aged 45 and over, do not increase their consumption significantly when the value of their property goes up, and this goes against the theory of 'wealth effect'. Thus, we are able to reject the theory as the connecting link between rising house prices and increased consumption," explains Søren Leth-Petersen. He believes that the reluctance by the homeowners stems from the fact that, for some people, houses or properties do not solely represent a financial value or asset, as for example registered securities or a car.

"Our house is our home and we all need a place to live. That is why homeowners in reality act different than the theory stipulates," says Søren Leth-Petersen.

In turn, Leth-Petersen suggests that it depends on the prospects of higher earnings which prompt homeowners to increase their consumption. Higher earnings also prompt investments into more expensive property and this creates rises to house prices on the housing market.

Scientifically important time period

The strength of the research lies in access to detailed individual data whereas economic theories usually have been developed based on calculations of averages on entire populations. This research has accessed household-level panel data which has then been grouped and studied. The researchers have analysed Danish tax administration data and combined information about income, wealth and savings as well as home ownership, age, education and family composition from 90,000 households and almost 400,000 observations for the period 1987-1996.

According to Søren Leth-Petersen, this period is particularly interesting because homeowners underwent a cycle in which house prices declined from 1987 to 1992 and then increased from 1993 to 1996. The period is also interesting because it was not possible for homeowners to use their house as security for consumption loans before 1992. This enabled the researchers to establish how households took out consumption loans based on their housing equity when such loans were introduced. The research shows that homeowners aged 45 and over did not react significantly to the rise in house prices. However, the younger homeowners, who are typically short of finances, took the opportunity to take out additional consumption loans when given the chance.

An international discourse

In an international light, Denmark is a small country with large amounts of data which through decades has been gathered systematically. This makes Denmark well-suited for economic research, but this particular research, according to Søren Leth-Petersen, should be an international theoretical discussion regarding 'wealth effect'. Also British studies suggest similar findings to the results of that of his and his colleagues' recent research.

The results of the study 'Housing Wealth and Consumption: A Micro Panel Study' is published in print 15 May in the acclaimed scientific journal 'The Economic Journal'.


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...I would say nothing to do with property rising in value unless of course a certain 'type' of person spends some more using newly obtained debt they have just obtained via a re mortgage, more 'free money' to spend but also more debt to repay that costs .....something that is not happening so much at the moment......insecure short-term jobs, low or no pay increases, less overtime, uncertainty about future financial security and high inflation are the reasons why there is a decrease in consumption despite 'low' interest rates...... and the higher the cost of living gets the less people will spend....time to do things differently. ;)

There is of course those that have so much they don't know what to spend it on.....let them kick start the economy, because they are the only ones capable at the moment....sell your stuff and tat to them. ;)

Edited by winkie
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Given that this assumption-otherwise known as 'the wealth effect'- is now the entire strategy for recovery of both the US and the UK I think immediate action should be taken.

The authors of the report should be ridiculed and discredited as soon as possible so that the money printing can go on.

By what oversight were these economists not bought off I wonder? Most of these academic whores do their masters bidding and produce the 'correct' conclusions.

Maybe they were worried that some student might run the numbers?

Two Harvard economists whose widely-cited research on austerity was called into question last month have published a formal correction.

Carmen Reinhart and Kenneth Rogoff acknowledged errors in the figures in their 2010 paper on government debt and economic growth.

They did not actually state a causal link between high levels of debt and falling rates of economic growth.

However, others have used the research to support austerity policies.

Flaws in the methodology in the paper first came to light when a masters student in the US found himself unable to replicate the findings of the study, called Growth in a Time of Debt.


So first the 'Austerity' theory goes pop- now the 'wealth effect' is gone too. Why don't they just inject the cash directly into the bank accounts of the 1% and give up trying to construct some socially useful rationale for the entire QE/Austerity bullshite.

There is no theoretical or practical proof that the entire core strategy of the Central Banks of the US and the UK does anything other than shower riches on the richest people on the planet.

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This has been known for years.

House-prices are correlated to growth and it suits the economists, and the people who pay them, to assume that

correlation = causation.

It doesn't, and they know it.

After a quick google, from 2009:


Other researchers have analysed data from Great Britain and have similarly found that, once one takes simultaneity problems into account, there is also little, if any, housing wealth effect in that country. Orazio Attanasio, Laura Blow, Robert Hamilton, and Robert Leicester (2009) express scepticism that a large housing wealth effect exists, and find, for instance, that (without correcting for simultaneity bias) the “wealth effect” appears to be the same for renters and homeowners. This would make no sense if household spending were really driven by housing wealth, because renters are actually hurt by rising home prices. They conclude, as we do, that housing wealth is acting mainly as an indicator of changes in perceived economic prospects, which apply to homeowners and non-homeowners alike.

Edited by (Blizzard)
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So first the 'Austerity' theory goes pop- now the 'wealth effect' is gone too. Why don't they just inject the cash directly into the bank accounts of the 1% and give up trying to construct some socially useful rationale for the entire QE/Austerity bullshite.

There is no theoretical or practical proof that the entire core strategy of the Central Banks of the US and the UK does anything other than shower riches on the richest people on the planet.

Yap, that is right.

Fake Austerity = Tax Revenue + borrowed money -> Top 0.1% ( I dispute your 1% figure, which represent around 600k people or around 200k familieis while a 0.1% figure represent 20k families)

Stimulus = Tax revenue + borrowed money + borrowed money -> Top 0.1%

Wealth effect = Tax revenue + printed money -> Top 0.5%

Solution : Actual austerity that prevent the first part of the equation from having enough money to dish out to those on the right hand side of the equation.

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I think the GDP increases as a higher mortgage adds to it (am I right?)

Of course. In the absence of that demand the UK govt is obliged to borrow and spend an additonal £130+bn every year to shore up the economy.

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