Household finance

The nascent household finance literature suggests that households rely on personal experience when making financial and economic decisions. For example, individuals who have lived through stock market crises, such as the Great Depression, are less likely to participate in the stock market (Malmendier and Nagel, 2011). CCFin researchers have shown that households rely on their personal experiences of housing price growth in their locality of residence when making consumption and labour supply decisions.

CCFin research finds that households increase their spending on nondurables and services when they have experienced higher house price growth in their locality. The effect is pronounced for both homeowners and renters, suggesting that experience effects influence household spending beyond the traditional housing wealth and collateral channels. Consistent with existing evidence, CCFin researchers find that homeowners who have experienced higher local price growth become more optimistic about future home price gains and therefore increase their spending. Renters, on the other hand, are discouraged from pursuing homeownership when they have experienced higher house price growth in their local area, thereby increasing their consumption.

CCFin researchers also find that households increase their labour supply when they have experienced higher house price growth in their locality. That is, past exposure to higher local house price changes leads to increases in households’ labour income and hours worked. The effect is more pronounced for non-college-educated households, who are more likely to increase their working hours when experiencing higher local house price changes. Moreover, the effects are similar between homeowners and renters, suggesting that experienced house price growth influences households’ labour supply beyond home equity effects. For homeowners, past experience of higher local price growth suggests they are less likely to be locked in their homes by leverage and, therefore, could broaden their job search geographically and increase labour supply. For renters, experiencing higher price growth suggests a higher cost of living, including rent payments, and therefore would work more to earn more to meet these costs. These findings point to the crucial role of personal experiences in shaping households’ financial decisions.