The Impact of the Tenure Choice Decision on Future Household Wealth

Abstract

Households must decide on the choice of tenure: Should housing be purchased or rented? In North America, about two-thirds of households own their homes and this figure is increasing after a period of decline. Government and society encourage homeownership. It seems to have become accepted wisdom that buying a house is the wise choice, both financially and psychologically, when making the home tenure decision. Is this the case for the average household, however, and, if so, how do we know? This paper provides a financial model that can be used to comprehensively analyze the impact the tenure choice decision has on household wealth. Given that the purchase of a home is the most significant financial decision the average household makes, the key questions a household must consider are: Given an information set regarding the choice of buying or renting a home, what is the expected financial outcome? Will the household be further ahead financially by buying? The results of the two case studies used to illustrate the model suggest that the financial impact of homeownership may not be as positive as perceived by the average North American household. The model can be easily adapted by users to reflect different assumptions.

Keywords: Housing, tenure choice, buy versus rent, household wealth

JEL Classification: D12, R21, R31, R38, R51