Pre-pension savings out of housing wealth: A comparative study of Italy and the Netherlands

This paper studies the housing wealth effect on pre-retirement savings using a comparative approach. By analysing similar survey data on household income and wealth, we estimate the housing wealth effect using the exogenous and unanticipated part of the change in home equity. Differently from previous studies, the unanticipated and exogenous part is elicited not only by filtering out previously stated expectations of future house prices from realised changes in housing wealth, but also taking into account the role of endogenous home improvements. Our theoretical model shows that changes in future prices unlock at the same time a direct intertemporal wealth-effect that increases consumption and investments, and an indirect endogenous effect whereby investments increases future home equity. Our estimation strategy shows that disregarding home improvements could induce a bias in the estimation of the wealth effect. Our regression results suggest this bias should be very mild. We speculate that this is the case because of the low correlation between increases in house value and the costs of home improvements