House price rises boosted growth, says Greenspan
By Gerard Baker in Washington
Increases in US house prices over the last five years have played a significant role in the consumer spending spree that has driven overall economic growth, Alan Greenspan, chairman of the Federal Reserve, said yesterday.
While the effect on consumption of the massive increase in stock prices has been the focus of most economists' attention, higher house prices tend to have a proportionately larger effect on consumers' spending patterns, the Fed chairman told a conference of America's Community Bankers.
Mr Greenspan did not suggest there were any immediate consequences for monetary policy from the process of so-called "equity extraction" but he argued that, since it was usually financed by increased borrowing, it was of increasing importance to the financial sector.
The average capital gain on a home in the last five years had been $25,000, Mr Greenspan said. Most homeowners realise that gain, either through sale of the house or through mortgage refinancing. Either way, some cash is released for purchases of big-ticket consumer items.
Research by the Fed's economists suggests the "wealth effect", the proportion of the increases in asset values that is spent by consumers, is larger for houses than for equities. About 3-4 per cent of gains in equity values was spent, Mr Greenspan said, while the figure for housing values was about 5 per cent.
The reason, Mr Greenspan said, was differences in the volatility of house and equity prices.
"While home prices do on occasion decline, large declines are rare; the general experience of homeowners is a modest, but persistent, rise in home values that is perceived to be largely permanent.
Mr Greenspan said that the proportion of owner-occupiers among young people had dropped in the last 30 years and he called on lenders to help reverse the trend.
Separately, the Commerce Department reported yesterday that Americans' seasonally adjusted personal spending rose 0.4 per cent in September, while aggregate incomes were unchanged from a month earlier. As a result the savings rate dropped to 1.6 per cent from 2.3 per cent in August.
Last week the department announced a significant change in the way it measures personal savings. It now counts contributions to the pension schemes of government employees as personal savings, not public sector savings as previously.
The change raised the personal savings rate over the last decade, lifting it out of the negative territory into which it had dropped in the last year.
|
