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Housing Habits and Their Implications for Life-Cycle Consumption and Investment

37 Pages Posted: 24 Feb 2015 Last revised: 26 Jan 2017

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Sebastian Wagner

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2017

Abstract

We solve a rich life-cycle model of household decisions involving consumption of perishable goods and housing services, habit formation for housing consumption, stochastic labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. In line with empirical observations, the optimal decisions involve (i) stock investments that are low or zero for many young agents and then gradually increasing over life, (ii) an age- and wealth-dependent housing expenditure share, (iii) non-housing consumption being significantly more sensitive to wealth and income shocks than housing consumption, and (iv) non-housing consumption being hump-shaped over life.

Keywords: Habit Formation, Life-Cycle Household Decisions, Housing Expenditure Share, Consumption Hump, Stock Market Participation, Renting vs. Owning Home, Human Capital

JEL Classification: G10, D14, D91, E21, R21

Suggested Citation

Kraft, Holger and Munk, Claus and Wagner, Sebastian, Housing Habits and Their Implications for Life-Cycle Consumption and Investment (January 26, 2017). SAFE Working Paper No. 85. Available at SSRN: https://ssrn.com/abstract=2568518 or http://dx.doi.org/10.2139/ssrn.2568518

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claus Munk

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/site/munkfinance/

Sebastian Wagner

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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