John Muellbauer (withValerie Chauvin, Banque de France)
Abstract: This paper analyses the links between French household consumption and household portfolios of assets, including housing and debt. A six-equation system for consumption, house prices, consumer credit, housing loans, liquid assets and permanent income uses latent variables to represent the crucial shifts in the availability of the two types of credit to households and measures their impacts. Changes in housing loan conditions, interest rates and demography account for a substantial part of the pronounced increase in real house prices and in the ratio of housing loans to income in France from 1996 to 2008. When credit is restricted, higher real house prices require younger households to save more for their down-payment if they wish to become home-owners, while tenants can expect rents to increase in the future and so need to save more also. Controlling for credit conditions, income, income growth expectations, debt and financial wealth, the estimates suggest that a 10% rise in house prices relative to income reduced aggregate consumption by about 1% in the early 1980s before housing loans conditions relaxed. By 2005, easier credit availability had transformed this into a small positive effect on aggregate consumption of around 0.2%. Previous research on aggregate consumption in France found unstable and weak wealth effects, while house price models failed to find stable and plausible parameter estimates. The findings have implications for understanding monetary transmission and risks for financial stability.