Wealth-to-Income Ratio, Housing Returns, and Systemic Risk

We show that the residuals of the trend relationship among asset wealth and human wealth predict housing returns. Using data for a set of industrialized countries, we assess the predictive ability of the wealth-to-income ratio for housing returns. In particular: (i) when housing asset are complements of financial assets, investors demand a higher housing risk premium if they are hit by a shock that generates a fall in the wealth-to-income ratio; (ii) when housing assets are substitutes of financial assets, investors demand a lower housing return if they face a fall in the wealth-to-income ratio. Finally, we show that the transmission of wealth shocks to housing markets is amplified in the outcome of episodes of systemic crises.