Journal Article

No. 2010-22 | August 05, 2010
Housing Wealth Isn’t Wealth PDF Icon

Abstract

A fall in house prices due to a change in 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 (the special case when the birth rate is zero, of 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. When the birth rate is positive, higher fundamental house prices driven by the housing demand of future generations will boost current consumption.

There is a pure wealth effect on consumption from a change in house prices even in the representative agent model, 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, a fall in house prices will then depress consumption in the short run while boosting it in the long run.
 

JEL Classification

E2 E3 E5 E6 G1

Citation

Willem H. Buiter (2010). Housing Wealth Isn’t Wealth. Economics: The Open-Access, Open-Assessment E-Journal, 4 (2010-22). http://dx.doi.org/10.5018/economics-ejournal.ja.2010-22

Assessment

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Comments and Questions


Laurence Copeland - Buiter on housing as wealth
August 13, 2010 - 08:50

See attachment


Willem Buiter - Reply to Copeland
August 13, 2010 - 22:55

Laurence Copeland's point is well-taken. In positing a sharp dichotomy between collateralisable housing wealth and non-collateralisable human wealth, I crossed the line from simplification to over-simplification. Both the ex-ante degree of collateralisability of different non-human assets and human capital, and the ex-post degree of enforceability of these collateralised loan ...[more]

... contracts are better viewed as continuous variables on the [0, 1] interval, say, than as binary variables. Housing loans can be with or without recourse to the non-housing assets and to the future income of the borrower, and with-recourse housing loans can put the non-housing assets and the future income of the borrower at risk for periods ranging from years to decades.

It remains a key empirical fact, that in societies without slavery and indentured labour, future labour income typically represents poor collateral from the perspective of legal enforceability - it frequently cannot be attached (seized by legal writ) at all. The phenomenon of unsecured lending reflects, in my view, reputational non-cooperative equilibria or other self-enforcing punishment strategies in repeated interactions or long-term relationships, rather than the likelihood of third-party legal enforcement of unsecured loan contracts by the attachment of the borrower's future labour income in case of default.