I examine the effects of local house price experiences on households’ consumption decisions. A one-standard-deviation increase in experienced price growth (a weighted average of past price growth in local housing markets) leads to a 2 to 6 percentage points more real spending of households. Results hold when using experienced price growth of geographically distant relatives as an instrument. Effects are similar for homeowners and renters. Additionally, younger renters spend more on food than older renters when experiencing higher local price growth. These findings are consistent with higher experiences increasing households’ expectations about future house prices and discouraging renters from homeowning.

I identify the effect of house price beliefs on household labor supply decisions. Using experienced price growth (a weighted average of past price growth in local housing markets) as the belief measure, I find that higher house price beliefs significantly increase household labor supply at both the extensive (labor income) and the intensive (hours worked) work margin. Results hold when using geographically distant relatives’ experienced price growth as an instrument. Effects are stronger among less sophisticated households, and there is no significant difference between the working propensity of homeowners and renters, thus distinguishing the belief channel from home equity channels.

Benjamin Appianin.

Benjamin Appianin.