Research Discussion Paper – RDP 2015-08 Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations Abstract

Understanding the relationship between housing wealth and consumption is important, because it informs the extent to which fluctuations in house prices might affect the broader economy. We investigate the relationship between housing wealth and consumption using postcode-level variation in house prices and administrative data on new passenger vehicle registrations as a proxy for consumption. In our preferred specification, we estimate an elasticity of new passenger vehicle registrations with respect to gross housing wealth of 0.4–0.5, and an average marginal propensity to consume (MPC) for new passenger vehicles of about 0.06 cents per dollar change in gross housing wealth. Assuming new vehicle registrations and total consumption have the same sensitivity to changes in housing wealth implies an MPC for total consumption of 2 cents per dollar change in gross housing wealth. But US evidence indicates that new vehicle consumption is particularly sensitive to changes in housing wealth. Assuming the same is true for Australia, our estimates imply an MPC for total consumption of less than 0.25 cents. Notably, we find evidence that the relationship between house prices and new vehicle registrations is heterogenous in income, with low-income households having a higher propensity to purchase a new vehicle following a rise in housing wealth than high-income households. This implies that the distribution of changes in house prices is relevant for understanding its effect on aggregate consumption.