The consumption choices of 'Generation Rent'

This thesis considers two questions: how does the aggregate quantity of consumption by young renters respond to house price shocks, and how has the increase in UK house prices changed how young renters allocate consumption between major expenditure categories. Results from a consumption life-cycle model show a positive relationship between the consumption growth by young renters and house prices. However, I conclude that this reflects a common factor such as income expectations independently determining both variables. I then estimate housing cross-price elasticities of demand for six major expenditure categories using a Quadratic Almost Ideal Demand System (QUAIDS) and UK household expenditure survey data. I identify differences in these elasticity estimates between higher and lower income young renter households, suggesting that rising house prices and lower homeownership rates is associated with increased financial stress for some households, but increased consumption of luxury goods by others. However, both higher and lower income rental households significantly increased the share of their budgets allocated to housing over the sample period, and experienced large declines in homeownership rates. These results highlight the importance of targeted housing affordability policies that consider these heterogeneities.