Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
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Tuesday, 17 September 2013
Will rising house prices cause a rise in consumer spending?
There's an old theory which says that rising houses prices make us feel wealthier and therefore we go out and spend more. The increased "wealth effect" is therefore supposed to have a positive knock-on impact into the wider economy.
Is it actually true?
Well, it seemed as though at times there was a surprisingly close link between real house prices and consumer spending in the past.
But the correlation may not be as strong in the future.
The link can be a complex one and the strength of the relationship can vary considerably over time.
The Bank of England carried out some research into the relationship between house prices and consumer spending.
They found that historically there been a very strong correlation at times, but perhaps the association between the two events has been mistaken for a causal link.
Just as with Pavlov and his dog - the dog learned that a bell being rung would automatically result in the arrival of food, but this was by no means necessarily the case.
Source: Bank of England
The Bank of England concluded that consumer spending and real house prices had moved together closely in the past, but noted how the empirical association waned somewhat at the beginning of the 21st century.
For a number of reasons - including the changing role of equity withdrawal, bequests, shifting spending patterns and precautionary savings, limits on borrowing - and a whole host of other reasons - we might expect the link to be less strong going forward.
To what extent the link has declined, concluded the Bank of England concluded, we can't yet be sure.