In economics, there is a belief that when housing prices increase, people would feel wealthier so they would consume more. This belief is usually used in policy making or to explain economic performance. Today I would like to discuss whether this belief could be explained based on microeconomics.
The important concept in microeconomics is that individual demand relies on two factors, price and wealth, (usually denoted as x(p,w)). If we only look at one time period, housing prices increase, the wealth increases, so individuals are likely to consume more. When we consider the aggregate demand, the population consumption will increase when housing prices increase. However, in the real world, we cannot only consider one period, when we are thinking about infinite time periods, we have to consider the changes in our wealth and the changes in prices, as individuals do not only make their consumptions on this period's prices and their net wealth, but they would also consider their future wealth and the prices in the future. Under such circumstance, the factors that influence housing prices increase. Moreover, considering the increase in wealth caused by housing price rise could be a temporary change or a permanent change in wealth. For example, in some large cities, particularly in China, the housing prices keep increasing over the time, such housing price rise could be seen as a permanent increase. Such change would cause one time permanent increase in individual's consumption; to generate more consumption boosts, it is necessary to have surprising increases in housing prices.. Of course, an one time increase in housing prices is a temporary change in wealth, this will increase individuals' consumption for only one period and in the next periods, the consumption will fall back to its previous level.
Therefore, the increase in housing prices could have impacts on consumption, but the effect is rather limited.
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