Working Paper 10/234 - abstract

Housing wealth or economic climate: why do house prices matter for well-being? (PDF, 444kB) 

Anita Ratcliffe

Revised December 2010
Original version April 2010

UK property prices more than doubled between 1997 and 2007. This paper examines whether house prices influence well-being, and if this effect runs via wealth, or whether other factors, such as economic conditions, drive both house prices and well-being. These alternative viewpoints have contrasting implications for the effect of house prices on homeowners' and non-homeowners' wellbeing, and are exploited in this paper to shed light on why house prices really matter. This approach contrasts with that of previous studies, in which the role of house prices is, a priori, assumed in the empirical strategy. This paper shows that while house prices do matter for well-being, they do not matter through wealth effects. Instead, the evidence points towards house prices acting as a barometer of confidence in the economy.