RDP 2003-07: Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia 6. Conclusions

In this paper we have followed Case et al (2001) and used a state-level panel to estimate the effect of changes in different components of wealth on household consumption expenditure in Australia.

In contrast to previous studies using economy-wide data, we find using state-level data that both housing wealth and stock market wealth are significant long-run determinants of consumption. The marginal propensity to consume out of stock market wealth is estimated to be larger than that with respect to housing wealth, and statistically significantly so in most cases. Using state-level data may thus have provided some further insight.

For our preferred model, a one-dollar permanent increase in stock market wealth is estimated to increase annual consumption by 6 to 9 cents in the long run and a similar increase in housing wealth is estimated to increase consumption by around 3 cents. Since households' housing assets are more than three times as large as stock market assets, our estimates imply that a one per cent increase in housing wealth has an effect on aggregate consumption that is at least as large as that of a one per cent increase in stock market wealth.

Finally, it is worth noting that these estimates refer to the long-run effect of a permanent change in wealth, which is likely to take years, rather than quarters to fully pass through to consumption.