Valuing Homeownership

Abstract:     
Housing tenure decision combines financial, economic and socio-psychological factors. This paper considers the global premium associated to homeownership. On the other hand, homeownership is associated to private benefits of being an owner. On the other hand, overinvestment in housing is harmful to diversification and distorts portfolio management. This trade-off, similar to the one associated to corporate private benefits of control, is the cornerstone of our theoretical model based on the expected utility maximizatioin. The originality of the model comes from its simplicity. Furthermore, the empirical implementation of the model, using price and rent data normalized by square-meter, exhibits a homeownership premium for houses in the Brussels Region teaching at least 9% of the housing price. The findings are robust to several methodological refinements. In particular, they confirm the link between liquidity constraints and house prices documented in the literature. However, the premium may largely vary from one place to another, according to tax laws, cultural habits and social status associated to tenure.

Keywords: Homeownership, Tenure choice, Housing, Real-estate

JEL Classification: R21, E21, G11

Accepted Paper Series