What May Eventually Limit Rising House Prices? Evidence from Engel Elasticities and Budget Shares of Housing

Rising house prices lead to questions of sustainability, since mortgages must be financed from future incomes. Much attention is thus focused on the relationship between housing expenditure and income. This article estimates Engel elasticities of housing expenditure for each independent cross‐section of the Norwegian Consumer Expenditure Surveys in the period 1986–98, and finds that the elasticity remains surprisingly close to unity for all years. Its mean over the period is 1.02. This indicates that when incomes or total consumption increase by 1%, then housing expenditure also increases 1%. Engel and demographic effects are estimated in an errors‐in‐variables two‐stage‐least‐square regression model using random samples. This article documents that, given demographic composition, a household's demand for housing seems to increase proportionately with total consumption, in contrast to categories such as food and transportation. This empirical regularity appears to be quite resilient towards changes in business cycles, relative prices and other time‐dependent changes. It may represent a basic pattern of consumption, and thus yield forecasting potential and herald the possibility of estimating ceilings to housing expenditure. If the elasticity continues to be unity, then over a period of time future housing expenditures will keep the same pace as incomes.