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Housing Wealth Isn’t WealthWillem 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 non-housing 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