House Ownership, Wealth and Age
We start with descriptive characteristics of the average wealth and wealth inequality.Footnote 9 First of all, Table 12.1 shows that Swiss residents are much wealthier than German residents. Secondly, owner households are much wealthier than renter households (five times in Switzerland, seven times in Germany). Even if owner households are a minority (46% in Germany, 37% in Switzerland) they own as much as 86% of the total wealth in Germany and 75% in Switzerland. Thirdly, Table 12.1 shows the decomposition of wealth inequality for the Squared Coefficient of Variation (SCV). Only 3.6% of the inequality in Switzerland and 6.7% in Germany are due to differences between groups. Thus, wealth inequality occurs mainly within owners and renters. Forth, the SCV and the Gini index by group reveal that inequality within renter households is considerably higher than inequality within owner households. Not the wealth gap between owners and renters but the lower inequality within owner households is the main reason that low homeownership rates are associated with high wealth inequality. An increasing share of homeowners implies a lower wealth inequality.
We next look at the relationship between age and wealth. Homeownership has shown to be most beneficial for wealth accumulation when houses are bought at a young age. Households have a longer period to accumulate wealth and to repay mortgage debt, respectively. Figure 12.1 predicts the nonlinear relationship between wealth and age of the household head (main income earner in Switzerland, reference person in Germany) using linear regression. The figure shows that house owners are wealthier than renter households but that the gap widens substantially over the life cycle. While the difference between the average wealth of owners and renters is rather small for household heads up to 40 years, it increases quickly thereafter.
There are different possible explanations for this pattern (see also Alik-Lagrange and Schmidt 2015). A first is that young renters also include future property buyers. They might either be saving to buy their own property or even possess the necessary assets but are waiting for a good opportunity to buy a home. At older ages, there are fewer households that prefer owning over renting and can afford buying at the same time. While this effect arises mainly through self-selection into homeownership, more savings of owner-occupiers are a second explanation for the increasing wealth gap between owner and renter households. Thirdly, owner-occupiers, who have been owners for a longer time, may have profited more strongly from rising property’s values than younger owners. Fourthly, the probability for significant inheritances is higher at higher ages. Wealth differences between renters and owners in precursor generations can insofar carry forward. Finally, the differences between ages might also be driven by cohort effects. But considering the similarity from Germany and Switzerland, it is unlikely that major historical events like the World War II and the German reunification are main explanations for the rising wealth gap between owners and renters with age in Germany.
Nevertheless, and considering that renting is a viable option in Switzerland and Germany, it is surprising that renters hardly accumulate wealth over the life cycle. Thus, other forms of self-selection might be relevant to explain the wealth difference. For example, if hedonists, who prefer current consumption over savings, are more prevalent among renters, this selection could explain the lower wealth levels of renters.
Another remarkable finding of Fig. 12.1 is the shape of the curve for owners at older ages. While the German households start dissaving at around age 65, the average wealth of owner-occupiers and to a smaller extent of renter households continues to rise to about 80 years of age in Switzerland. One possible explanation for this diverging pattern is the lack of care insurance in Switzerland compared to Germany, which encourages wealth accumulation even after retirement to finance care costs.Footnote 10 In contrast, intergenerational wealth transmissions might play an important role for the observed dissaving effect in Germany (Westermeier et al. 2016).
Explaining the Ownership Wealth Gap
To better explain the differences between renters and owners, we use decomposition methods, which are widely used for other group differences, most frequently for the gender–wage gap. The most widely used method is the Oaxaca-Blinder decomposition. Juhn et al. (1993) expanded this approach beyond the mean to different quantiles of the distribution and suggested decomposition into three components: characteristics, coefficients and residuals. More recently, counterfactual distributions are used to explain the differences between groups (see Fortin et al. 2010 for a review on decomposition methods). Here, we adopt the method proposed by Chernozhukov et al. (2013), which uses conditional quantile regression. Estimates have been obtained with the Stata command cdeco (for quantiles) and jmpierce (for the mean). The conditional wealth distribution of renters is used as the benchmark. This nonparametric decomposition method is advantageous because it not only focusses on the mean but also does not require assumptions about the underlying distribution.
To mitigate the influence of outliers in the wealth distribution, we apply the inverse hyperbolic sine transformation (Johnson 1949) of net worth for the conditional distribution. Explanatory variables encompass age, household type, gender, permanent income and its square term, educational levels, urban municipality, migration background, wealthy parents, bad health, the presence of siblings and received inheritances and bequest.
Results in Table 12.2 show that differences in these observable characteristics (column 2) explain only a small part of the wealth differences between renters and owners. At the mean, different socioeconomic characteristics explain 16% of the wealth differences in Switzerland and 32% in Germany, respectively. Looking at quantiles, we can see that composition effects become more important if one moves up in the wealth distribution. In Switzerland, the different characteristics of owners and renters explain 16% of the wealth gap at the 25th percentile and 29% at the 90th percentile. In Germany, the composition effect increases from 9% at the 10th percentile to 67% at the 90th percentile. The higher permanent income of owners compared with renters is the most important driver for the composition effect. However, the effects of observed characteristics (price effects in column 3) are much more important for wealth differences. For example, being an owner and having the exact same characteristics as a renter will lead to a higher net worth in both countries. Rising values of properties and more regular savings of house owners compared to renters are possible explanations for this finding. The impact of unobserved price and quantities is more relevant at the lower and the upper end of the wealth distribution. This indicates that other factors not considered in the regression analyses may play a role.