Additional housing equity collateral can loosen borrowing constraints and increase spending for households that value their home highly. However, rising home values also raise the cost of living via higher imputed rental costs, offsetting their impact on consumption. Usage of Household Finance and Consumption Survey microdata and third-party evaluation of housing value enable identification of the causal effect of house price changes on consumer spending. This paper is one of the first that explores this relationship European-wide with an application of an instrumental variable technique. The paper identifies heterogeneities among different households based on their housing status. A $1 increase in home values leads to a $0.127 increase in spending for homeowners overall, and $0.185 for homeowners with mortgages specifically. Results reflect large responses among credit-constrained households, suggesting borrowing constraints as one of the key drivers of the MPC out of housing wealth.
Keywords: Housing Wealth, House Prices, Household Consumption.
JEL codes: E21, G51, O18.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.