Homeownership status and its effect for housing wealth - consumption channel in Europe

The importance of dynamics in housing value and its impact on the aggregate consumption was a highlight of the global financial crisis. Although the theoretical relationship has been analyzed by various authors, the empirical facts in Europe remain fragmented and ambiguous. To support the discussion with an empirical facts, I use detailed household level data from the Household Finance and Consumption Survey to identify the causal effect of house price changes on the consumer spending. To account for possible endogeneity problems, I create an instrumental variable that allows me to examine the relationship between house price changes and the aggregate consumption on the subsample of European countries. In line with other literature, my results identify heterogeneities across different households based on their housing status. The results also show that a 1 € increase in home values leads to a 0.126 € increase in expenditure for homeowners in general and 0.187 € for homeowners with mortgages in particular. Finally, the results reflect large responses among credit-constrained households, suggesting that borrowing constraints are one of the key drivers of the marginal propensity to consume (MPC) from housing wealth.