Discussion Paper

No. 2009-56 | December 16, 2009
Housing Wealth Isn’t Wealth


A fall in house prices due to a change in its fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run.

JEL Classification:

E2, E3, E5, E6, G1


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Cite As

Willem H. Buiter (2009). Housing Wealth Isn’t Wealth. Economics Discussion Papers, No 2009-56, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-56

Comments and Questions

Anonymous - Referee Report 1
February 03, 2010 - 11:37

I have now read the paper by Willem Buiter submitted to Economics. The paper is smartly worded and makes a dramatic point. That this "no housing wealth effect" conclusion follows from his model I am prepared to believe. The basic point--that an increase in housing wealth has opposite effects of ...[more]

... those who are long housing and those who do not already have housing--is already well known, but I have not seen a story that marks housing wealth as
having exactly zero effect. To somebody who is less in love with rational optimizing models, this story is rather a curiosity, and the actual effect of housing wealth changes is certainly still an empirical question, and relates to things like the relative salience of housing wealth to these different groups of consumers. It would be good if the author discussed this point in a revision.
I would also encourage the author to justify better the conclusion that there is a difference between fundamentals and bubbles in wealth effects. Bubbles are in some sense caused by misperceptions about fundamentals, so the dichotomy he proposes may not be as clean as the author seems to think.
I suppose this paper is publishable because it makes the point so succinctly and dramatically. The paper is well written and the title is certainly catchy.

Anonymous - Referee Report 2
March 17, 2010 - 09:03

See attachedf file

Michael Haliassos - Decision Letter
March 29, 2010 - 10:45

see attached file