Housing wealth is far more important than stock market wealth when it comes to boosting consumer spending, according to the Bank of Canada.

In a paper published in the Spring 2004 issue of the newsletter Bank of Canada Review, Lise Pichette, of the bank’s research department, writes: “Our findings suggest that consumption does not respond significantly to a permanent increase in stock market wealth, while a permanent increase in housing wealth leads to a significant rise in consumption.”

The conclusions may come as a surprise to analysts who believe that a sharp rise in equity values was an important factor in the strong consumer spending that occurred between 1995 and 2000. Pichette says that her findings can be explained by two factors: changes in equity prices tend to be more temporary than changes in housing prices; and only a small share of households hold equities in their portfolios.

Pichette found that the marginal propensity to consume (MPC) due to increased stock market wealth is small and statistically insignificant — less than 0.5¢ in added consumption per dollar of added wealth. But the MPC for housing wealth is 5.7¢ per dollar. The stronger link between housing wealth and consumption relative to stock market wealth can be explained by its more equal distribution among households and the greater likelihood that the average change in housing wealth will be permanent.

“Since changes in wealth directly affect aggregate demand, central banks must pay attention to this factor when formulating monetary policy,” the paper says.