This paper investigates whether (and why) house prices influence subjective well-being. House prices have featured in previous analysis as a proxy for local prices and are found to have little impact on happiness (see Blanchflower et al 2004, Luttmer 2005). However, we apply insights from a literature on consumption and house prices to investigate whether the influence of house prices on subjective well-being varies by tenure status.

In the consumption literature there are three explanations as to why rising house prices is associated with greater consumption (and subsequently subjective well-being) for homeowners. The wealth channel is based on the Permanent Income/Life Cycle Hypothesis and suggests that rising house prices directly affect the lifetime resources and hence consumption of homeowners. Two other channels focus on imperfections in credit markets to explain how housing assets (used as collateral) enable homeowners to get a better deal in credit markets. The credit channel predicts homeowners benefit from reduced costs whereas the liquidity channel predicts homeowners benefit from improved access to loans. While these channels focus on homeowners, the consumption of prospective homeowners is also influenced by rising house prices as housing becomes more expensive. Their consumption (and subjective well-being) is predicted to fall in this instance. The contrasting influence of house prices on consumption and subjective well-being might explain why house prices have not been found to influence happiness. Observing this tenure-based pattern of house prices on subjective well-being would also be consistent with relative wealth differences in a similar vein to the relative income literature. A final theory in the consumption literature - the common causality channel - suggests that tenure status is irrelevant because higher consumption and house prices are driven by third factors such as earnings expectations. Subjective well-being ought to rise for all tenure groups if this explanation is correct.

We use the British Panel Household Survey (BHPS) between 1991 and 2004 to test whether the influence of house prices on subjective well-being varies by tenure status. British data provides an ideal case study given the substantial variation in house prices both across regions, across time and within regions across time. The period analysed includes both upturns and downturns in the British housing market. This BHPS repeatedly surveys a random sample of approximately 5500 British households and contains a standard measure of subjective well-being (the General Health Questionnaire). We match a local measure of average house prices from the Halifax Building Society - the UK's biggest mortgage lender - to these data and identify 117 local areas in Great Britain. We also match local area data on earnings, unemployment and population structures to control for variables correlated with house prices. Preliminary results suggest that rising house prices improves mental well-being across all tenure groups. These results are consistent with house prices reflecting omitted variables such as earnings expectations and possibly local public goods and amenities.

References

David G. Blanchflower and Andrew J. Oswald (2004): "Well-being over time in Britain and the USA", Journal of Public Economics, 88, 1359-1386

Erzo F.P. Luttmer (2005): "Neighbors as Negatives: Relative Earnings and Well-Being", The Quarterly Journal of Economics, 120(3), 963-1002