The effect of housing prices on consumption and economic growth – the case of Taiwan

In many countries around the world since the subprime-mortgage crisis in 2008, soaring housing prices under central governments' quantitative easing (QE) monetary policies have deteriorated home affordability. For example, in Taipei's environment of long-term low property taxes, the price-to-income (PTI) ratio reached 16 in 2014, which is higher than the corresponding ratios in most cities around the world. The fiscal pressure that mortgage payments impose on households seems to crowd out their consumption capability and thus to counter economic growth. However, current literature has revealed diverse effects of housing prices on consumption in far-flung countries. To discover the influence of housing prices on consumption and economic growth, we collected data in Taiwan for empirical analysis. Results show that the stock price index has had a significant positive effect on consumption, whereas interest rates have played a minimal role in consumption. Results also show that rising house prices have had a negative effect on consumption, indicating that high housing prices trigger the crowding-out effect on consumption and in turn contribute to sluggish economic growth. The findings of this study provide the government in Taiwan with policy implications for directing housing prices in ways that facilitate both long-term housing affordability and economic sustainability. Further, this paper explains that, across countries, differences among homeowners' home-equity 'cash-out' behaviors may help explain the differences among the behaviors' diverse effects on consumption. Results of this study not only empirically strengthen academia's knowledge of housing prices' effects on consumption but also suggest that the policy-driven development or promotion of home-equity financing may enhance consumption and revive flagging economies.