Do House Prices Affect Consumption? A Comparison Exercise

This paper undertakes a comparison exercise to disentangle what drives the opposite findings regarding the effect of house prices on consumption documented in two papers using the same data set for the UK. On the one hand, Campbell and Cocco (2007) find that old owners are the most benefited by a house price increase and young renters the least, confirming the so-called wealth hypothesis. On the other hand, Attanasio, Blow, Hamilton, and Leicester (2009) find that house prices have the same impact on consumption across age groups, consistent with the so-called common factor hypothesis. We rule out that changes in the sample period, the definition of consumption, the data source, the type of price deflator, and empirical considerations such as endogeneity bias and sampling noise in the construction of synthetic cohorts are the driving factors of the opposite conclusions reached by the two papers. All our evidence points towards the empirical specification, i.e., whether it is a consumption function (an equation for the level of consumption) or an Euler equation (an equation for consumption growth) as the only plausible explanation to the conflicting results. Our findings revive the debate of whether there is an effect of house prices on consumption, an issue of increasing importance in the current context of declining house prices in industrialized countries.