Housing Leverage and Consumption Expenditure-Evidence from New Zealand Microdata

This paper investigates how household debt affects the marginal propensity to consume out of housing wealth. We use New Zealand household-level data on spending, income, and debt over the period 2006-2016. The main empirical challenge is to identify exogenous variation in house prices to determine how consumption evolves with movements in household wealth. This identification problem is complicated by the presence of unobserved household characteristics that are correlated with housing wealth. We use a detailed house sale dataset to derive local average house prices and use it as an instrument. Our empirical results show that the estimated elasticity of consumption spending to housing wealth is about 0.22%. In dollar terms, the average marginal propensity to consume out of a one-dollar increase in housing wealth is around 2.2 cents. Furthermore, our empirical results also confirm that household indebtedness, especially via mortgage debt, acts as a drag on consumption spending, not only through the debt overhang channel, but also through influencing the collateral channel of the housing wealth effect.​

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