The cyclical association of residential housing price and consumption

Abstract

This paper develops a theoretical framework to investigate private consumption changes that are brought about by the residential housing price effect, which in turn is envisaged to comprise the income effect, substitution effect, and expectation effect along with the residential price cycle. A frequency domain-based model that employs cross-spectra analysis is consistent with such a theoretical framework, and helps to validate it, as its model-free characteristics avoid the problems of model misspecification and parameter estimation error. In the Singapore context, the results show that residential price affects consumption significantly, depending on the time scale and frequency without a consistent sign. The expectation effect, operating through the capital gain effect, is important in explaining the residential price-consumption relationship and contributes more during the expansion period than the recession period.