Muellbauer_0415_Password_Removed.docx
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1、 Housing, Credit and Consumer Expenditure John N. Muellbauer 1. Introduction One important channel by which developments in housing mar- kets affect the macro-economy is through changes in consumer be- haviour. More favourable access to credit has raised household debt levels in many countries and h
2、ouse price appreciation has led to in- creased household wealth. Several factors underlie the improved ac- cess to credit, including changes in prudential and wider capital mar- ket regulations, technological change and reductions in the cost of information technology, developments in the sharing of
3、 information on credit histories, and the deepening of markets for securitized con- tracts and derivatives. The increased ability of households to extract or borrow against their home equity has altered consumer spending and saving behaviour in many countries. New types of mortgage con- tracts have
4、made housing more affordable at given home prices; but while lenders have often succeeded in spreading their risks through the financial system, the risks for many borrowers have increased. The aim of this paper is to discuss housing wealth and other asset effects in the context of lifecycle consump
5、tion theory, augmented for credit channel effects and taking account of credit market liberaliza- tion. In Section 2, it is argued that there is some justification from simple lifecycle permanent income theory for the Bank of England s 267 268 John N. Muellbauer view that there is no effect on consu
6、mption from a permanent in- crease in house prices. However, as soon as credit constraints based on asymmetric information between borrowers and lenders enter the picture, the implications for consumption alter dramatically. Where mortgage credit markets are poorly developed, potential first-time bu
7、yers have to save a significant fraction of their income for a hous- ing deposit, while existing owners have limited access to home eq- uity loans. When house prices rise, potential first-time buyers have to save yet harder, while the owners do not increase their spending much given limited access t
8、o the extra collateral. The overall effect of the rise in prices is then to reduce consumption. However, lib- eralization and improvements in the efficiency of mortgage credit markets change both dimensions: The young save less and housing equity becomes more collateralizable. When house prices rise
9、, there is then only a small negative effect on the spending of potential first- time buyers, and a larger positive effect on that of existing owners as their collateral values increase. In Section 2, the consequences of institutional differences in credit markets for consumer behaviour through time
10、 and in comparisons between countries are discussed. Various nuances of credit market and other institutional differences are explored. In practice, there is widespread disagreement about the role of housing wealth in explaining consumption. Much of the empirical literature (briefly reviewed in Sect
11、ion 3) is marred by omitted con- trols for the common drivers both of house prices and consumption, including income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (such as changes in the unemployment rate). Omitted controls a
12、re likely to be correlated with house prices, thereby making estimated wealth or collateral effects liable to bias. For instance, while the easing of credit supply conditions is usually followed by a house price boom, failure to control for the direct effect of credit liberalization on con- sumption
13、 can overestimate the effect of housing wealth or collateral on consumption. Further, models formulated entirely in quarterly differences, as some are, may not well measure long-run responses. Housing, Credit and Consumer Expenditure 269 This paper explores the consequences of credit market liberali
14、zation through the lens of a modern version of the Friedman-Ando-Mo- digliani solved out consumption function. An extended framework for modelling the consumption effects of housing wealth, collateral and credit is presented in Section 4, encompassing traditional fea- tures of lifecycle theory such
15、as income growth expectations, but building in the main elements of the household credit channel. This gives rise to an empirical model that allows the consequences of shifts in credit supply conditions for consumer spending to be tested, as well as checking for differences in the marginal propensit
16、y to con- sume out of different types of assets. It takes account of the long- run information in data on consumption, income, assets and debt which is thrown away in the alternative (differenced) Euler equation approach. The model is also more robust than the Euler approach to deviations from the l
17、atter s extreme assumptions about household rationality and information processing capacity. This extended model has been applied in the UK, the US and other countries, including South Africa and Japan, though the results for the US and Japan are still preliminary.1 The results are discussed in Sect
18、ion 5. Key to this work is the development of an indicator of the shift in credit market supply conditions. For the UK, we have a so- phisticated index developed in Fernandez-Corugedo and Muellbauer (2006), consistent with a large credit market liberalization beginning in 1980. Liberalization signif
19、icantly raised the consumption-to-income ratio and significantly altered the response of consumption to several drivers, most importantly to housing wealth. The evidence is that before 1980, there was no housing wealth effect on consumption, but that this effect now somewhat exceeds the effect on co
20、nsumption of illiquid financial wealth. Evidence also points very strongly to a larger marginal propensity to consume out of liquid assets (minus debt) than that of all other assets. Further, in a separate model, the Bank of England s estimates of housing equity withdrawal are well explained by this
21、 credit conditions index and its interaction with housing wealth. However, housing equity withdrawal has no explanatory power in our extended consumption function. 270 John N. Muellbauer For the US, we use a proxy for credit supply conditions based on the Federal Reserve s Senior Loan Officer Survey
22、 question on banks willingness to make consumer loans for durables purchases. To en- sure robustness to the possible omission of long-run influences on consumption coming from demography, rising inequality and other factors, the consumption model includes a smooth stochastic trend. The key findings
23、are the same as for the UK: The easing of credit market conditions has caused a significant rise in the consumption- to-income ratio and a positive shift in the housing collateral effect. As in the UK, we find a higher marginal propensity to consume out of liquid assets minus debt than out of illiqu
24、id financial assets. How- ever, our preliminary evidence points to the US housing collateral ef- fect now being larger than in the UK and significantly exceeding the illiquid financial wealth effect. For the US, this supports the claims of the widely cited paper by Case et al. (2005) and research by
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