House prices, housing wealth and financial well-being

The causal chain between house price variation and observable changes in economic behavior including consumption requires that individuals perceive the impact of house price movements on their household wealth and recognize the impact on their financial situation. In this paper we establish evidence for the first link in this causal chain by investigating the effect of house price variation on perceived financial well-being using longitudinal information on subjective financial satisfaction. Exploiting substantial variation in local house prices in Australia across time, we find that plausibly exogenous unanticipated increases in local house prices improve the perceived financial well-being of home owners. The impact is strongest for mortgage owners, suggesting a strong collateral effect. We also highlight important asymmetries in the effects of house price shocks on perceived financial well-being associated with both the direction of the house price shock and tenure status. Mortgage owners exhibit more significant changes in their financial well-being in response to positive house price shocks. Furthermore, we highlight a weaker wealth effect for individuals that are liquidity constrained suggesting that these constraints are important for understanding responses to housing wealth shocks.