Rising house prices affect household spending by either loosening a household's lifetime budget constraint (pure wealth effect) or the household's borrowing constraint so that consumption rises toward the level implied by the consumption Euler equation (borrowing collateral effect). The empirical findings in this paper are consistent with house price appreciation affecting household spending through the borrowing collateral channel and not the pure wealth effect channel. The consumption of potentially borrowing constrained households increases between [dollar]0.06 and [dollar]0.18 per dollar increase in their housing equity, while the consumption of unconstrained households is little changed.

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