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On the heels of this morning’s report of lower-than-expected increase in home prices, Deutsche Bank economist Carl Riccadonna remains bullish on housing and its impact on the economy.In a new note to clients, he projects home price appreciation between 5 and 10 per cent for the year ahead. He further explains why this is good news for households as well as the extent to which the wealth effect magnifies consumer spending:
…price appreciation enables households to refinance debt, thereby reducing interest expenses, as well as tap into home equity via lines of credit or cash-out refinancing… The prevailing estimates of the wealth effect on consumption from home price appreciation is generally believed to be around 0.05 to 0.10. In other words, a one dollar increase in home values lifts consumer spending by five to 10 cents.
Based on projections for home price appreciation, Riccadonna indicates consumer spending should receive a boost between $43 and $172 billion, which “is substantial considering that real consumer spending increased by $178 billion over the past four quarters.”
“Through its direct and indirect effects, the housing sector alone could potentially contribute as much as 2% to real GDP growth this year,” write Riccadonna.