Housing Wealth Isn’t Wealth
Willem H. Buiter, 2008
Presentation by Aleksey M. Martynyuk
Summary
• Background
• Housing Wealth –
Life-cycle Hypothesis
• Paper’s Summary
• Related Findings
• Conclusion
Life-Cycle Hypothesis
• Households smooth out fluctuations in
current income
• Changes in wealth are built into consumption
plans; unanticipated changes lead to a
revision of those plans
Wealth Effects
• Direct Wealth Effects
• Credit Constraint Channel
• Common Cause Channel
Wealth Effects
• Direct Wealth Effects
– Unanticipated increases in wealth will increase
will lead to an increase in consumption
– Housing W vs. Financial W
• Housing’s illiquidity
– Financial innovations help
• Income groups distribution
• Permanence
– Needs Empirical Backing
Wealth Effects
• Credit Constraint Channel
– MEW - mortgage equity withdrawal
– Limited to credit-constrained households
– Cost of credit
– Effects vary due to the heterogeneity of the agents
Wealth Effects
• Common Cause Channel
– Financial Liberalization
– Increase in both secured (collateralized) and
unsecured debt
– Consumption increase for all agent
– Real interest rates, productivity shocks,
expectations
Buiter’s position
“In a representative agent model,
a decline in house prices does
create a negative wealth effect on
aggregate consumption demand.
On average, consumers are neither
worse off nor better off.”
Buiter’s position
“The fundamental value of a
house is the present discounted
value of its current and future
rentals, actual or imputed.”
Buiter’s position
• Consumer durable example
• Long housing vs. Short housing
• Landlords vs. Tenants
Buiter’s proposition #1
• In the representative agent model
a change in the fundamental value
of a unit of installed housing has
no wealth effect on aggregate
consumption demand, the
demand for housing services or
the consumption demand for nonhousing goods and services.
Buiter’s proposition #2
• In the representative agent model
a change in the bubble component
of the price of a unit of installed
housing is associated with a
wealth effect on aggregate
consumption demand, on the
demand for housing services and
on the consumption demand for
non-housing goods and services.
Buiter’s proposition #3
• In the OLG model higher fundamental
house prices have a positive aggregate
wealth effect and a positive effect on
aggregate consumption demand, on the
demand for housing services and on the
consumption demand for non-housing
goods and services if the higher
fundamental house prices reflect
(expected) demand for housing services
by future generations.
Distributional Effects
• Life cycle
• From the unborn to those
currently alive
• Age-dependent propensities to
consume
Age-dependent propensities
to consume
• Older generation might have a
higher propensity to consume
• Younger generation might be
liquidity-constrained
Conclusion
• No change in consumption on
aggregate
• Redistribution of wealth between
long-housing and short housing
• Pure wealth effect if bubble is
present
• Two indirect channels:
– Difference in MPC
– Credit effects