Tenure Choice and the Riskiness of Non-Housing Consumption
Posted: 7 Apr 2003
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.
Keywords: Housing Demand, Tenure Choice, Income Fluctuations
JEL Classification: R21
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