Research on the Effect of Home and Rental Prices on Private Consumption

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To the research

 

  •   The increase in home prices in the past few years contributed to an increase in private consumption by households living in an owner-occupied dwelling, who constitute 70 percent of households.  Most of the effect was found to be among those aged 35–55.
  •   The rapid increase in home prices between 2009 and 2011 contributed about one-third of the aggregate growth in private consumption during those years, compared to a smaller contribution between 2004 and 2008, thereby offsetting part of the effect on the economy of the global crisis.
  •  The increase in rental prices served to reduce consumption on the part of households living in rented dwellings.  In contrast, however, it led to a similar increase in consumption by those renting out apartments.
  •  The effect of the increase in home prices is stronger on the consumption of durable goods than on current consumption.

 

A study conducted by Sigal Ribon and Miki Kahn of the Bank of Israel Research Department, which assessed the effect of home and rental prices on private consumption in Israel, found that an increase in home prices works to increase consumption on the part of home owners. The effect is focused on those aged 35–55, and is not significant among those of other ages.


The results support the assumption that the effect of the increase in home prices on consumption is mainly due to the increase in the value of households’ wealth, which is generally the case among those aged 35–55, and is less due to the easing of liquidity limitations, which are more frequently felt among those of younger age - two channels that were found to have an effect on private consumption in many other studies around the world.


The study tested the link between the housing market and private consumption in Israel for the first time through the combination of detailed data on household consumption from expenditure surveys conducted by the Central Bureau of Statistics with data on home and rental prices by residential area and size of the dwelling, for the years 2003 to 2011, and with the household’s self-evaluation of the value of its dwelling.


It was found that the effect on private consumption of the significant home price increases since 2008 was stronger than that of the prolonged decline in prices during the ten years ending in 2007.  The rapid increase in home prices between 2009 and 2011 contributed about one-third of the growth in private consumption in those years, compared to a smaller contribution between 2004 and 2008, thereby offsetting part of the effect of the global crisis on the economy.  Rental price increases contributed to a reduction in consumption by tenants, while increasing consumption among landlords.  In total, the housing market contributed to an expansion in private consumption during these years.


In recent years, developments in home prices were very different in various areas of the country (See Figure 1 below).  The home price that better explains the changes in consumption is the one that relates to a dwelling in the same area and with a similar size as that of the household, while changes in the national average price do not affect household consumption. In other words, the household attributes importance to the development of prices reflecting the area in which it lives and not those reflecting the general situation in the housing market or in the economy as a whole.
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According to the analysis contained in the study, the rate of households living in rented accommodations was 27 percent on average over the sample period.  However, among those aged 20–34, the rate was 51 percent, while among those aged 55–64, the rate was just 14 percent. In the north of the country, the rate of households living in rented accommodations was 16 percent, while in Tel Aviv the rate was about 48 percent. Tenants’ expenditure on rental payments as a share of total expenditure was about 24 percent on average, about 17 percent in the north and about 28 percent in Tel Aviv.

The study also found that the effect of changes in home prices on home owners’ consumption of durable goods was larger than their effect on their current consumption.