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Valuing Homeownership

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Abstract

Housing tenure decision combines financial, economic and socio-psychological factors. This paper considers the global premium associated to homeownership. On the one hand, homeownership is associated to private benefits of being an owner. On the other hand, overinvestment in housing is harmful to diversification and distorts portfolio management. This trade-off, similar to the one associated to corporate private benefits of control, is the cornerstone of our theoretical model based on the expected utility maximization. The originality of the model comes from its simplicity. Furthermore, the empirical implementation of the model, using price and rent data normalized by square-meter, exhibits a homeownership premium for houses in the Brussels Region reaching at least 9% of the housing price. The findings are robust to several methodological refinements. In particular, they confirm the link between liquidity constraints and house prices documented in the literature. However, the premium may largely vary from one place to another, according to tax laws, cultural habits and social status associated to tenure.

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Notes

  1. Coulson (1999) stresses that this proportion is lower among recent immigrants. Garriga et al. (2006) mention an upward trend starting in 1995 and investigate potential explanations.

  2. The phenomenon has also been considered from the socio-psychological viewpoint. For instance, Dupuis and Thorns (2002) refer to the “ontological security” of homeownership.

  3. See, e.g., Green and White (1997) and Aaronson (2000) on the impact of homeownership on school attainments.

  4. This approach is in line with the analytical framework proposed by Henderson and Ioannides (1983) but contrasts with most existing papers that use dynamic models.

  5. See, e.g. Glaeser et al. (2008) on housing bubbles.

  6. The assumption is questionable. A wedge between interest rates and rental prices is indeed one possible deviation (rent undervalued). However, we do not include the costs associated to buying (more than 10% in Belgium) and mortgage costs (price undervalued).

  7. http://www.nbb.be/belgostat/PublicatieSelectieLinker?LinkID=596000016|910000082&Lang=E

  8. 2003 is the last year for which the UGEB data are available.

  9. Source: World Development Indicators CD-2005.

  10. Measuring the volatility of the real-estate market remains a challenge which hampers any empirical study on real-estate investments. Actually, appraisal indices by private companies are the major source of time series data and, hence, for empirical studies. However, such indices are smoothed which induces the housing market’s volatility to be underestimated (Ross and Zisler 1991; Geltner 1993). One advantage of our approach is that, being based on observations (not on appraisal), it circumvents the risk of underestimating volatility.

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Acknowledgments

The authors thank Carlos Garriga and anonymous referees for very useful comments.

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Authors and Affiliations

  1. Solvay Brussels School of Economics and Management (SBS-EM), Dulbea, Université Libre de Bruxelles (ULB), Brussels, Belgium

    Khalid Sekkat

  2. Solvay Brussels School of Economics and Management (SBS-EM), Centre Emile Bernheim, Université Libre de Bruxelles (ULB), Brussels, Belgium

    Ariane Szafarz

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  1. Khalid Sekkat
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  2. Ariane Szafarz
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Correspondence to Khalid Sekkat.

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Sekkat, K., Szafarz, A. Valuing Homeownership. J Real Estate Finan Econ 43, 491–504 (2011). https://doi.org/10.1007/s11146-009-9212-0

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