RDP 2015-08: Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations 8. Conclusion

We have used postcode-level variation in house prices and new passenger vehicle registrations to investigate the relationship between house prices and consumption. We make use of a rich set of control variables, such as postcode-level income growth and unemployment rates, to help identify the direct effect of housing wealth on consumption. The use of new passenger vehicle registrations as a consumption measure is dictated by our identification strategy, but we nonetheless believe it is well-suited to identifying the relationship between housing wealth and consumption. Vehicle registration data are comprehensive and are measured with minimal error. Furthermore, US evidence indicates that consumption of new vehicles is one of the most prominent uses of housing wealth.

We have identified a robust cross-sectional relationship between changes in housing wealth and new vehicle registrations. In our preferred specification, we estimate an elasticity of new passenger vehicle registrations with respect to gross housing wealth of 0.4–0.5, and we estimate an average MPC for new passenger vehicles of about 0.06 cents per dollar change in gross housing wealth. Our estimated MPC for new vehicles is much smaller than comparable US estimates for the 2002 to 2009 period, possibly because changes in lending standards and the financial crisis amplified the usual relationship between housing wealth and consumption.

Assuming new vehicle and total consumption have the same sensitivity to changes in housing wealth implies an MPC for total consumption of 2 cents per dollar change in gross housing wealth. But US evidence indicates that new vehicle consumption is particularly sensitive to changes in housing wealth. Assuming the same is true for Australia, our estimates imply an MPC for total consumption of less than 0.25 cents. This contrasts with existing Australian research, which has tended to find MPCs for total consumption in the 2–4 cent range.

Notably, the estimated relationship between new vehicle registrations and housing wealth is about four times larger at the 25th percentile of the income distribution than at the 95th percentile. Thus, the effect on aggregate consumption of a change in housing wealth depends on its distribution across income groups. We believe this is the first evidence outside of the United States of heterogeneity in MPCs by income group for housing wealth.