No one will debate whether increasing home prices have had a positive effect on consumer spending. But there is considerable debate on how significant this effect is. I am in the camp that believes that the housing boom was the main contributor to consumer spending since 2001.

Last week’s Economist highlights a new study that estimates that each dollar increase in house prices eventually boosts consumer spending by 9 cents rather than 3 to 5 cents as widely thought. This implies that a loss of $1 trillion in housing wealth — which is how much housing wealth increased annually in recent years — would cause consumption to decline by $90 billion or three-quarters of a percentage point from GDP.

In addition, as the housing slump worsens we can expect massive unemployment to hit construction workers, real estate agents, mortgage brokers, etc. This will lead to a substantial loss of income and consumption which should cause GDP to fall by much more than three quarters of a percent.