The Journal of Real Estate Finance and Economics

, Volume 35, Issue 4, pp 427–448 | Cite as

Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?

  • N. Kundan Kishor


This paper uses long-run equilibrium relationship between consumption and different components of wealth to estimate the effect of changes in housing wealth and financial wealth on consumption. By exploiting this long-run property, it has been shown that a dollar increase in housing wealth increases consumption by seven cents, whereas, a corresponding dollar increase in financial wealth increases consumption by only three cents. This difference in the wealth effect arises because transitory shocks dominate variation in financial wealth, whereas permanent shocks account for most of the variation in housing wealth. This paper also shows that the relative importance of permanent component for housing wealth has witnessed an increase over the last thirty years. Therefore, housing wealth effect has also increased over time.


Beveridge–Nelson cycle Cointegration Consumption Kalman filter State-space model Wealth effect 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Benjamin, J., Chinloy, P., & Donald Jud, G. (2004). Real estate versus financial wealth in consumption. Journal of Real Estate Finance and Economics, 29, 341–354.CrossRefGoogle Scholar
  2. Brennan, M. J., & Xia, Y. (2005). Tay’s as good as cay. Finance Research Lettrs, 2, 1–14.Google Scholar
  3. Campbell, J. Y., & Mankiw, G. (1991). Consumption, income and interest rates: Reinterpreting the time series evidence. In O. Blanchard & S. Fischer (Eds.), NBER Macroeconomics Annual: 1991. Cambridge: MIT Press.Google Scholar
  4. Campbell, J. Y. (1996). Understanding risk and return. Journal of Political Economy, 104, 298–345.CrossRefGoogle Scholar
  5. Campbell, J. Y., & Cocco, J. (2007). How do house prices affect consumption? Evidence from micro data. Journal of Monetary Economics, 54, 591–621.CrossRefGoogle Scholar
  6. Case, K. (1992). The real estate cycle and the economy: Consequences of the Massachusetts boom of 1984–1987. Urban Studies, 29(2), 171–183.CrossRefGoogle Scholar
  7. Case, K., Quigley, J., & Shiller, R. J. (2005). Comparing wealth effects: the stock market versus the housing market. Advances in Macroeconomics, 5(1), Article 1.CrossRefGoogle Scholar
  8. Cochrane, J. H. (1994). Permanent and transitory components of gdp and stock prices. Quarterly Journal of Economics, 109, 241–265.CrossRefGoogle Scholar
  9. Engelhardt, G. (1996). House prices and home owner saving behavior. Regional Science and Urban Economics, 26, 313–336.CrossRefGoogle Scholar
  10. Gonzalo, J., & Granger, C. (1995). Estimation of common long memory components in cointegrated systems. Journal of Business and Economic Statistics, 13, 27–35.CrossRefGoogle Scholar
  11. Gonzalo, J., & Ng, S. (2001). A systematic framework for analyzing the dynamic effects of permanent and transitory shocks. Journal of Economic Dynamics and Control, 25(10), 1527–1546.CrossRefGoogle Scholar
  12. Hansen, B. E. (1992). Tests for parameter instability in regression with I(1) processes. Journal of Business and Economic Statistics, 10(3), 321–335.Google Scholar
  13. Juster, F., Lupton, J., Smith, J., & Stafford, F. (1999). Savings and wealth: Then and now. University of Michigan Discussion Paper.Google Scholar
  14. Kim, C. J., & Nelson, C. R. (1999). State-space models with regime switching. Cambridge: MIT Press.Google Scholar
  15. King, R., Plosser, C., Stock, J., & Watson, M. (1991). Stochastic trends and economic fluctuations. American Economic Review, 81, 819–840.Google Scholar
  16. Lettau, M., & Ludvigson, S. (2001). Consumption, aggregate wealth and expected stock returns. Journal of Finance, 56(3), 815–849.CrossRefGoogle Scholar
  17. Lettau, M., & Ludvigson, S. (2004). Understanding trend and cycle in asset values: Re-evaluating the wealth effect on consumption. American Economic Review, 94(1), 276–299.CrossRefGoogle Scholar
  18. Ludvig, A., & Slok, T. (2002). The impact of changes in stock prices and house prices on consumption in OECD countries. IMF Working Paper.Google Scholar
  19. Morley, J. (2002). A state-space approach to calculating the Beveridge-Nelson decomposition. Economic Letters, 75(1), 123–127.CrossRefGoogle Scholar
  20. Pichette, L., & Tremblay, D. (2004). Are Wealth Effects Important for Canada. Bank of Canada Working Paper.Google Scholar
  21. Podivinsky, J. M. (1992). Small sample properties of tests of linear restrictions on cointegrating vectors and their weights. Economic Letters, 39, 13–18.CrossRefGoogle Scholar
  22. Poterba, J. (2000). Stock market wealth and consumption. Journal of Economic Perspectives, 14, 99–118.CrossRefGoogle Scholar
  23. Sellon, Jr., G. H. (2002). The changing US financial system: Some implications for the monetary transmission mechanism, Federal Reserve Bank of Kansas City Economic Review.Google Scholar
  24. Stock, J. H., & Watson, M. (1988). Testing for common trends. Journal of the American Statistical Association, 83(104), 1097–1107 December.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • N. Kundan Kishor
    • 1
  1. 1.University of Wisconsin-MilwaukeeMilwaukeeUSA

Personalised recommendations