Lifting your spending because your home went up in value may not sound sensible, but the statistics suggest it is exactly what many households have been doing in the past couple of years.

Recent analysis from ANZ Bank illustrates a clear pattern when comparing how much households are saving and their wealth.

As shown in the graph, the percentage of income that is saved tends to go down when there is an increase in household wealth, which is closely linked to house prices.

In economics, it’s known as the “wealth effect” – the idea that people will change their behaviour because they feel richer thanks to higher asset prices.

It is an outcome the Reserve Bank hopes for when it cuts interest rates, because it tends to stimulate the economy.

However, the wealth effect is also largely an illusion for many home owners. If it’s an investment property and you sell it, then that is tangible wealth you now have at your disposal.

But if the property is the home you live in, which is more common, then tapping into this wealth is likely to involve trade-offs.

If you sell the house, you’ll probably find other houses in the same area have gone up by a similar amount. So to truly be better off, you’d need to downsize or move to a different area.

Another way of tapping into rising housing wealth is to take out a loan against the house, but that involves paying interest.

As many home owners with children struggling to afford their own place are also finding out, rising house prices also serve to transfer wealth between generations. As more parents try to counter this, they often end up dipping into their own savings to help their children get a leg-up into the property market.

So, in many cases, the increase in wealth is largely illusory, rather than tangible. That doesn’t, however, seem to stop households from changing their behaviour when property prices rise.

Economists reckon increased spending due to the wealth effect is one reason why retailers’ turnover has been growing more strongly lately, at about 4.5 per cent a year.

Sean Keane of Triple T consulting points out it is 0.7 per cent higher than average since the global financial crisis, thanks in part to the housing boom.

A key question, however, is whether the boost to spending is only temporary, and things die down when the property market cools off.

Many experts are now predicting the property markets of Sydney and Melbourne could slow down, and if they are right, this could also restrain the increase in consumption by households.

Posted by Clancy Yeates – Money Manager (Fairfax) on 13th October, 2015