This paper addresses the question of how changes in stock market wealth and housing wealth affect consumption expenditure in Australia. We approach the problem using a panel of Australian states, for which we construct data on housing and stock market wealth.

We estimate the link between consumption and the components of wealth using panel-data estimation techniques, including fixed-effects instrumental variable and panel DOLS estimators. Unlike previous studies, we find that both housing wealth and stock market wealth have a significant effect on Australian consumption. We estimate that a permanent increase in households' stock market wealth of one dollar increases annual consumption by 6 to 9 cents in the long run while a permanent increase in housing wealth of one dollar is estimated to increase long-run annual consumption by around 3 cents. However, given that households' housing assets are more than three times as large as stock market assets, our estimates imply that a one per cent increase in housing wealth has an effect on aggregate consumption that is at least as large as that of a one per cent increase in stock market wealth.