Relationship between household wealth and consumption

Wealth can affect personal consumption through various channels. For example, households whose wealth increases due to higher asset prices may spend more because they have more resources available and their liquidity or collateral constraints are relaxed. Households may also use credit to insulate their spending from financial shocks, although for some of them the higher debt service costs may leave fewer funds available to smooth their consumption, and thus put them at risk of financial hardship. As household heterogeneity can play an important role in how average consumption responds to wealth changes, household level data are crucial in assessing the structural relationships between average wealth and average consumption. In particular, there are likely to be differences between households comprising young adults at the start of their working lives, and households made up of retirees.

Relationship between housing prices and household wealth

As changing real estate prices may have a major impact on household assets and indebtedness, a body of research has aimed at understanding the relationship between these variables. Micro data are essential for this research, as they show the detailed composition of assets and liabilities across individual households. They can also support investigations into mismatches between assets and liabilities and help to assess the risks that too much debt or inadequate diversification of assets might pose for the households concerned and for the wider economy.

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