Tenure choice and the riskiness of non-housing consumption |
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| Institution: | 1. Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, UK;2. Department of Real Estate and Urban Land Economics, University of Wisconsin, 975 University Avenue, Madison, WI 53706, USA;3. Department of Economics, University of Munich, Kaulbachstr. 45, D-80539 Munich, Germany;1. Aston Business School, Aston University, Birmingham B4 7ET, United Kingdom;2. School of Business and Economics, Loughborough University, Leicestershire LE11 3TU, United Kingdom;3. Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, United Kingdom;1. Sorbonne Universités, UPMC Univ Paris 06, CNRS, Lab. PHENIX, Paris, France;2. Grupo de Fluidos Complexos Inst. de Quimica, Univ. de Brasília, Brasília (DF), Brazil;3. Lab. Léon Brillouin – CE-Saclay, Gif-sur-Yvette, France;4. Dpt de physique, Univ. de Cergy Pontoise, Cergy-Pontoise, France;1. Department of Mechanical Engineering, University of Rochester, Rochester, NY 14604, United States;2. MIT Department of Materials Science and Engineering, Cambridge, MA 02139, United States;3. Texas A&M University, Materials Science and Engineering, College Station, TX 77843, United States;1. Department of Decision Sciences and IGIER, Bocconi University, Via Roentgen 1, 20136 Milan, Italy;2. The George Washington University School of Business, Funger Hall 415, 2201 G Street, NW, Washington, DC 20052, USA |
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| Abstract: | This paper analyzes a household's choice of housing tenure within a dynamic utility maximization model that yields simple analytical results under uncertainty of income, housing prices, and rents. Given a housing consumption plan, we show that a decrease in the covariance between a household's earnings and housing rents increases the likelihood of ownership. A household who plans to remain in its home over a long period is more likely to own; a household who plans to remain in its home over a short period is more likely to rent. The higher the covariance between the user cost of a home and that of other properties a household is likely to consider in the future, the more likely the household is to own this home. These predictions of our model find support in recent empirical studies. |
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