Do house prices matter for well-being?

Abstract (via Anita Ratcliffe @ University of Bristol)

This study investigates whether and why house prices matter for well-being. House prices may influence well-being via a wealth/access-to-credit mechanism, as a rise in prices increases housing wealth and the collateral value of a house, and via a relative concerns mechanism, if renters compare themselves to homeowners and vice versa. Alternatively, any correlation between house prices and well-being may simply reflect broader economic conditions rather than a causal effect. Using local area house price data, this study distinguishes between these alternative explanations by comparing the correlation between local house prices and well-being for homeowners and renters. A small positive correlation between house prices and well-being exists for both homeowners and renters, indicating the absence of a wealth/credit mechanism or relative concerns mechanism. This correlation cannot be explained by economic variables such as local unemployment, earnings or earnings expectations, hinting at a purely psychological phenomenon.

Excerpted Introduction (via Anita Ratcliffe @ Univesrity of Bristol)

There is a growing interest in economics in understanding what makes people happy. The e ndings so far suggest that people like having more income (Frijters et al., 2004) and wealth (Gardner and Oswald, 2007), and particularly like having more income relative to others (Ferrer-i-Carbonell, 2005; Luttmer, 2005; Vendrik and Woltjer, 2007). In addition to personal circumstances, people are also sensitive to macroeconomic conditions. Residents in countries with higher per capita income report higher well-being (Di Tella et al., 2003) whereas residents in countries with higher inflation and unemployment report lower well-being (Di Tella et al., 2001). Despite impacting on (housing) wealth, the distribution of wealth, and providing an indicator of broader economic developments, house prices feature in few existing studies of well-being. Yet the scale of house price movements suggests there is scope for a substantial role of house prices in the determination of well-being. Between 1991 and 2007 UK house prices doubled in real terms, from $104 000 to $210 000, in spite of house prices falling in the early nineties.

Excerpted Conclusion (via Anita Ratcilffe @ University of Bristol)

This study investigates whether, why and to what extent house prices a ect well-being. In spite of substantial increases in UK house prices, there is no evidence that the well-being of homeowners has been influenced by rising house prices via a housing wealth or credit e ect. Movements in house prices are positively correlated with movements in well-being for both homeowners and renters, even after controlling for a personal characteristics, local wages and unemployment, time and area fixed e ffects, and a proxy for earnings expectations. This suggests that the relationship between house prices and well-being may not be driven by economic fundamentals and may reflect a purely psychological phenomenon.

Click here To Read: Housing wealth or economic climate: Why do house prices matter for well-being?

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28. April 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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