House Prices and Consumption Inequality

I characterize how house price shocks affect consumption inequality using a life-cycle model of housing and nonhousing consumption with incomplete markets. I derive analytical expressions for the dynamics of inequalities and use these to analyze large house prices swings seen in the UK. I show that movements in consumption inequality were large, that they correspond with the theoretical predictions qualitatively, and that the model explains a large fraction of the movements quantitatively. I demonstrate the accuracy of this analysis using an extended model’s full non-linear solution. Finally, accounting for house price shocks alters estimates of labour-income risks using cross-sectional data.