# Renting versus Owning and the Role of Human Capital: Evidence from Germany

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## Abstract

In a world with complete markets, the decision whether to rent or buy a home is not influenced by risks related to human capital. If markets are incomplete and have frictions, however, this may change. Renting should become more likely the more mobile a household has to be and the more income risk can be diversified. Using household panel data from Germany, we test both predictions. We find that mobility requirements have a positive effect on the probability of renting. This effect is robust even after controlling for state dependence, unobserved heterogeneity and other factors known to influence the tenure mode choice. Our data, however, does not support the hypothesis that the potential to diversify net income risk when renting affects the tenure mode choice.

## Keywords

Tenure mode choice Household mobility Background risk## JEL Codes

R21 G11 J24 C23 C25## Notes

### Acknowledgments

We have benefited from comments on earlier versions of this paper by five anonymous referees, Bernd Fitzenberger, James Follain, Christian Hilber, Franz Hubert, Verity Watson and participants at presentations at the AREUEA Annual Conference 2009, ERES Annual Conference 2008, Regensburg Conference on Real Estate Economics and Finance 2007, University of Aberdeen, DIW Berlin, Heriot Watt University Edinburgh, Humboldt-Universität zu Berlin, Universität Hannover, and Universität Tübingen. The usual disclaimer applies.

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