Why Does the Propensity to Home Ownership Vary?: Focusing on the Role of Borrowing Constraints

38 Pages Posted: 14 May 2019

See all articles by Man Cho

Man Cho

KDI School of Public Policy and Management

Date Written: May 13, 2019

Abstract

The propensity to own (rather than to rent) primary residence tends to vary across geographical areas, over time, and among consumer cohorts. This study investigates why that is the case by focusing on the role of borrowing constraints in residential mortgage lending in Korea. In particular, a discrete tenure choice model is established, based on which effects of both wealth and income constraints as indicated by the maximum loan-to-value (LTV) ratio and that of debt-to-income (DTI) ratio are estimated. Using the household-level micro data from Korea, we report that: the lending restrictions exhibit negative effects on the propensity to own, which are also shown to increase for younger borrower cohorts. Despite the fact that the residential mortgage lending sector of the country experienced a substantial growth during our study period (2006 to 2014), the effects of the wealth constraints increased over time, which we interpret as a possible outcome of the more binding lending restrictions combined with the location-based regulatory controls. Using the empirical findings, we provide a preliminary result of our analysis on the optimal LTV level by age cohort.

Keywords: housing and mortgage demand, tenure choice, and borrowing constraints

Suggested Citation

Cho, Man, Why Does the Propensity to Home Ownership Vary?: Focusing on the Role of Borrowing Constraints (May 13, 2019). KDI School of Pub Policy & Management Paper No. 19-04, Available at SSRN: https://ssrn.com/abstract=3387152 or http://dx.doi.org/10.2139/ssrn.3387152

Man Cho (Contact Author)

KDI School of Public Policy and Management ( email )

87 Hoegiro
Dongdaemun
Seoul, 130-868
Korea

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