- Buying a home leads to increased spending on household items, furniture, traveling expenses, etc.
- Appreciation of a home's value leads to positive wealth effects on consumption.
- Home-price appreciation increases the value of the collateral held on a mortgage. The owner of that collateral can refinance the mortgage on the new value of the home, which facilitates new consumption via home equity withdrawal.
The chart illustrates home equity withdrawal as a % of disposable income and consumption growth in the UK. As recently as Q1 2008, home equity withdrawal was very positive, 2.9% of disposable income.
There is a positive correlation between home equity withdrawal and consumption growth, 0.3 over the sample; consumers usually spend home equity lines of credit directly (do work on the home, take a vacation, etc.), or indirectly via paying down other types of debt (auto loans, credit cards, etc.). Obviously, home equity lines of credit do not determine consumption in full - other factors, like the labor income, is more important in forecasting aggregate consumption. However, the lack of home equity withdrawal drags the flow of consumption.
McKinsey & Company (register for free to view the article) did some nice research on debt-fueled consumption (partially by home equity lending) in the US, and I remember reading a quality post at Calculated Risk on the subject.