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When house prices rise, so do retail prices
Store owners who see local home values go up may want to raise prices.
Homeowners feel wealthier and pay less attention to retail prices when house prices rise.
- House prices rose solidly in 2014, and economists expect prices to increase further this year. That could give retail prices a boost, according to research by New York University’s Johannes Stroebel and Chicago Booth’s Joseph S. Vavra.
- To analyze how retail prices respond to changes in house prices, the researchers used bar-code-level price data from 2,400 US zip codes on a variety of products, mostly items found in grocery stores and drug stores. They find that when local house prices doubled, product prices in the area increased by 15 to 20 percent. Retail prices rose higher in areas with stronger house-price growth.
- When house prices rise, homeowners feel wealthier and pay less attention to retail prices, the researchers argue. Retailers increase their markups as a result.
- This effect was only detectable in areas with large proportions of homeowners—rising home prices didn’t have the same effect on renters. The difference in retail prices between areas in the top and bottom quartiles of house-price growth was larger in areas with more homeowners than in areas with mostly renters (see chart).
Johannes Stroebel and Joseph S. Vavra, “House Prices, Local Demand, and Retail Prices,” Working paper, April 2015.
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