ASSETS: Asset Prices, Consumption and Income Distribution


Various studies investigate how housing wealth changes affect consumption. Work Package 6 plans to extend this analysis to newly admitted members of the European Union, starting with the Czech Republic where Micro Census data are readily available. The research also intends to enhance the methodological arsenal in this context by state-of-the art panel data stationarity tests and Granger causality.

Prior to a recent decline, property prices had risen dramatically in many European countries. This phenomenon may have been demand driven due to lower mortgage rates and desire of foreigners to own property in new member countries of the European Union. Alternatively, it may well be that lowering barriers to cross-border lending, arising from the liberalising services directive of the EU, or that particular wealth effects arising from housing bubbles in one country (e.g. the UK) are transferred to other countries with the subsequent ramp-up of localised house prices. In other words, we will look for causes of the burst real estate bubble. A (potentially rational) bubble on the housing market can be identified by analyzing a discrepancy between market prices and corresponding fundamentals, e.g. rents. WP 6 will analyse this phenomenon using regional panel data within individual countries.

Finally, the research will study the mechanism via which property prices affect consumption and consequently welfare. A calibrated finite life-cycle model will be used for such purpose. An important part of the calibration exercise is the life-cycle distribution of income. This WP will also investigate a reverse causality and quantify the effect of changing house prices on the income distribution, taking into account the differential impact these changes have across cohorts.

Description of work

Impact of changes in asset prices on consumption

Here the focus is on the mutual interaction between property returns, returns on financial assets, and consumption. This interaction has been often discussed in the context of a sharp collapse of stock prices in the early 2000s and a recent decline of property prices. This study will quantify the impact of such abrupt changes in asset prices on household consumption using micro data from the Czech Republic and other countries subject to data availability.

Identification of housing bubbles

It is of interest to timely identify bubble occurrence since a bursting bubble in a housing market negatively affects GDP and hence consumption. This research will combine panel data tests for unit roots, cointegration and Granger causality using shorter time span data on house prices and rents. The study will test for a bubble in the Czech Republic using data on 335 regions from 2001 to 2008. Results will be used to assess whether an error correction model is appropriate for house prices in the Czech Republic. If not, the Czech Republic has experienced a bubble. This study will be extended to other countries subject to data availability.

Impact of changes in property prices on welfare and income

Probable causes of high property prices prior to their recent collapse are a greater demand due to cheaper mortgages and joining the European Union for newly admitted countries, as well as the changing household structure in the EU-15. This study will investigate the impact of such changes on the welfare of households using a life-cycle model.

Impact of changes in property prices, risk and taxes on inequality

Housing assets have both a consumption and an investment component. For low income individuals, the degree to which they can trade their housing assets with better (in terms of profit and risk) assets is more limited. This research will assess the degree to which a riskier housing market adversely impacts on property owners of different income levels and hence, with different credit constraints. It will also analyse the degree to which differences in the tax system of different financial assets impact on individual portfolios.

Work Package Leader: Petr Zemcik, Economics Institute

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