The Effect of House Prices on Household Saving: The Case of Italy Discussion by Giovanni Mastrobuoni, Collegio Carlo Alberto and CeRP

Research question Housing is a major component of wealth. Between 1995 and 2005 in Italy (but not only) house prices have grown in real terms by an average of 2.7 percent. How do changes in housing wealth affect consumption? Use micro data to avoid spurious regression

Theoretical Predictions (based on a 2 period model) When housing prices go up people have to pay more for housing services (implicit rent)  People who expect to live for a long time in the house (young people) should increase their consumption less than old people (who spread the capital gains over a shorter time horizon) Test:

Empirical results are based on a unique panel data set (11,000 hhs over 10 years) that contains: –Subjective housing values (these are the ones that actually matter, highlight it, it’s a strength!) –Outstanding mortgage debt=D –Net available income=Y –Consumption (is it total consumption?)=C –Savings=Y-C –Several socioeconomic factors

1 st Regression: For old people a euro increase in their capital gains leads to a 27 euro increase in savings

2nd Regression because owning a house and having capital gains is endogenous: endogenous switching model: INSTRUMENTS: “In order to facilitate the identification of the model we use a set of dummy variables that are likely to affect the supply of housing, hence the owning decision, but have no influence on the overall amount of savings. These are a set of dummy variables relative to the dimension of the city of residence.”

Comments I Highlight the Strength of the Paper: –Campbell and Cocco (2007) JME: “The ideal solution to this problem (endogeneity of capital gains) is to estimate a selection equation jointly with the consumption Euler equation on the household level. Unfortunately due to the repeated cross section nature of the data, this is not feasible. We have investigated if there are techniques that deal with this sample selection issue in a synthetic cohort framework, but without success. In addition, all micro datasets that contain reasonably good consumption data are repeated cross sections.”

Comments II It would have been more natural to estimate: instead of: According to the model consumption depends on the level of the housing value and its change on the capital gains! Justify why the level of savings is used instead. Also, in Table 3 for renters the equation is estimated in levels (why?)

…continues Moreover, taking the difference the authors would get rid of unobserved fixed effects. For example, people who are more forward-looking tend to save more, but may also make better housing investments. This would generate a positive correlation between savings and capital gains (thus downward biasing the estimate… is this why the elasticities are so small?)

Comments III The authors disregard borrowing constraints. But an increase in H might loosen these constraints  Do people who are more likely to face borrowing constraints (low H and high income growth) respond more strongly to an increase in H The authors could separate expected from unexpected changes in H estimating its serial correlation (see Campbell J., Cocco J., 2007 JME)

Comments IV Justify the instruments used in Table 3. Why do some of the instruments enter column 2 (the saving equation for renters)? Given the emphasis of the effect of capital gains by age on consumption it would be better to move to a multi-period model.

Minor things I: Papers to cite Campbell J., Cocco J., 2007 "How Do House Prices Affect Consumption? Evidence from Micro Data”, Journal of Monetary Economics 54: , April 2007 –Engelhardt, G.V., House prices and home owner saving behavior. Regional Science and Urban Economics 26, 313–336. –Flavin, M., The adjustment of consumption to changing expectations about future income. Journal of Political Economy 89, 974–1091. –Goetzmann, W.N., The single family home in the investment portfolio. Journal of Real Estate Finance and Economics 6, 201–222. –Sheiner, L., Housing prices and the savings of renters. Journal of Urban Economics 38, 94–125. –Skinner, J., Housing and saving in the United States. In: Noguchi, Y., Poterba, J.M. (Eds.), Housing Markets in the United States and Japan. University of Chicago Press, Chicago, IL, pp. 191–213 –Attanasio, O.P., Weber, G., The aggregate consumption boom of the late 1980s: aggregate implications of microeconomic evidence. Economic Journal 104, 1269–1302.

Minor things II I would move paragraph 3 (The Italian hh’s wealth: some stylized facts) before the theory part and merge it with the introduction. Page 10 the authors say that 95 percent of Italian HH reside in the house they own but in table 1 it’s only 72 percent. Make the coefficients in Table 2 and 3 comparable