A shift in the value of housing does not affect household wealth in the aggregate, he says, because on average everyone is a tenant in his own home. A price fall hurts those who are “long” housing assets, ie, those who own more property than they will need over their lifetime (call them landlords). It benefits those who are “short” housing, ie, those who plan to buy a property or to trade up to a bigger one in the future (call them tenants). The average experience is of an owner-occupier who plans to live in his home until he dies. Unless he worries about how much he will leave to his heirs, he is indifferent to the value of his home.The qualifier 'generally' is needed since Buiter excludes property price changes that stem from speculative bubbles since in the Buiter model:
'should prices fall because of a bubble bursting, then there is a wealth effect. Landlords are worse off because they lose the bubble value—the part that did not reflect fundamentals. But tenants are no better off, because the present cost of future housing services is unchanged'.Otherwise falls in house prices are transfers of wealth between landlords and potential buyers and will not have deflationary effects. They will simply be redistributions. Thus the standard sorts of wealth multipliers which are between 0.01-0.07 for rich countries (so if wealth rises by $1, spending rises by between one and seven cents) are an exaggeration. There should be no deflationary impact from the current fall in house prices to the extent these reflect a collapse in fundamental valuations.
Of course the empirical relevance of the Buiter argument depends on the extent to which current house prices are falling in response to a deflated bubble. My guess as a non-specialist macroeconomist is that this is in fact a fair part of the current story.
The complete NBER Working Paper can be sought here.