1. Housing Wealth Isn’t Wealth Willem H. Buiter, 2008 Presentation by Aleksey M. Martynyuk

2. Summary Background Housing Wealth – Life-cycle Hypothesis Paper’s Summary Related Findings Conclusion

5. Life-Cycle Hypothesis Households smooth out fluctuations in current income Changes in wealth are built into consumption plans; unanticipated changes lead to a revision of those plans

6. Wealth Effects Direct Wealth Effects Credit Constraint Channel Common Cause Channel

7. Wealth Effects Direct Wealth Effects – Unanticipated increases in wealth will increase will lead to an increase in consumption – Housing W vs. Financial W Housing’s illiquidity – Financial innovations help Income groups distribution Permanence – Needs Empirical Backing

8. Wealth Effects Credit Constraint Channel – MEW - mortgage equity withdrawal – Limited to credit-constrained households – Cost of credit – Effects vary due to the heterogeneity of the agents

9. Wealth Effects Common Cause Channel – Financial Liberalization – Increase in both secured (collateralized) and unsecured debt – Consumption increase for all agent – Real interest rates, productivity shocks, expectations

10. Buiter’s position “In a representative agent model, a decline in house prices does create a negative wealth effect on aggregate consumption demand. On average, consumers are neither worse off nor better off.”

11. Buiter’s position “The fundamental value of a house is the present discounted value of its current and future rentals, actual or imputed.”

12. Buiter’s position Consumer durable example Long housing vs. Short housing Landlords vs. Tenants

13. Buiter’s proposition #1 In the representative agent model a change in the fundamental value of a unit of installed housing has no wealth effect on aggregate consumption demand, the demand for housing services or the consumption demand for non- housing goods and services.

14. Buiter’s proposition #2 In the representative agent model a change in the bubble component of the price of a unit of installed housing is associated with a wealth effect on aggregate consumption demand, on the demand for housing services and on the consumption demand for non-housing goods and services.

15. Buiter’s proposition #3 In the OLG model higher fundamental house prices have a positive aggregate wealth effect and a positive effect on aggregate consumption demand, on the demand for housing services and on the consumption demand for non-housing goods and services if the higher fundamental house prices reflect (expected) demand for housing services by future generations.

16. Distributional Effects Life cycle From the unborn to those currently alive Age-dependent propensities to consume

17. Older generation might have a higher propensity to consume Younger generation might be liquidity-constrained

18. Conclusion No change in consumption on aggregate Redistribution of wealth between long-housing and short housing Pure wealth effect if bubble is present Two indirect channels: – Difference in MPC – Credit effects