Consumption, household portfolios and the housing market in France

Abstract:

Not all co-movements between consumption and wealth are wealth effects. Some result from common factors: shifts in credit conditions, interest rates, income expectations or demographics. Unravelling these is necessary for modelling linkages between households and finance. The findings for France from a 6-equation model for consumption and the main elements of household portfolios are that marginal propensities to consume financial wealth are comparable to those in the US or the UK, but housing wealth effects are far weaker, and aggregate consumption falls with higher house prices relative to income. This is interpreted as the need for younger households in France then to save more if they wish to become homeowners, while other tenants can expect rents to increase in the future, saving more in consequence. The estimates suggest that during the French house price boom between 1996 and 2008, offsets from the negative effect of higher house prices and higher debt neutralized the positive effects of higher housing wealth and easier credit on consumption, avoiding the amplifying feedbacks, via consumption, of the US boom.