The Australian Housing and Urban Research Institute (AHURI) has released an interesting new report entitled Housing prices, household debt and household consumption, which examines the relationship between increasing housing prices (or housing wealth) and the increased consumption expenditure of households from before the GFC and afterwards. Below are the report’s key points:
- This research finds a positive relationship between changes in house values or housing wealth, and, consumption expenditure. The increase in consumption is more pronounced for middle aged home owners compared to households that belong to younger or older cohorts.
- Prior to the Global Financial Crisis (GFC), an increase in house values of $100,000 was associated within an average increase in consumption between $1,000 (for old aged households) to $1,700 per annum (middle aged households).
- The relationship between housing prices or house values and consumption was moderated by the GFC: after the GFC, house price rises were associated with increased consumption for old and middle-aged households of approximately $600 to $1,600 per annum respectively.
- Prior to the GFC, house price changes were associated with large increases in consumption for home owners who initially borrowed a larger fraction of the property price (or have a higher ‘loan to value’ (LTV) ratio). By 2009 (after the GFC), this effect did not hold, suggesting that households with higher LTV ratios have become more conservative in their response to a change in house prices.
- This change in behaviour is not apparent for rental investors. In 2003, home owners with a rental investment property had a larger consumption response to an increase in house prices ($2,400 average annual consumption increase for a $100,000 increase in house prices) relative to home owners who do not have an investment property ($1,700). This differential was larger again in 2009 ($2,800 compared to $1,500). Since the GFC, the evidence suggests that home owners who are not investors have moderated their consumption behaviour while home owning investors have increased their consumption.
- The results for investors with and without debt prior to and following the GFC suggest an amplified role of the collateral channel for investors. That is, the relaxation of credit constraints for investors appears to be an important determinant of how responsive such households are to a change in house prices.
