Home ownership and the housing market in an ageing society - A stochastic simulation study

• Applicant: Professor Dr. Hans Fehr
• Subject Area: Economic Policy, Applied Economics
• Term: from 2016 to 2020
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 321813858

Especially in an ageing society housing consumption and housing wealth have important economic and social implications. Over the life cycle housing consumption and the share of home owners grows steadily until retirement. Consequently, changes in the age structure have a direct effect on the housing demand and home ownership. Since typically homeowners save more than renters, rising home ownership increases capital accumulation and economic growth. In addition it also provides an insurance against long term care and longevity risk. Consequently, especially ageing societies should aim for an efficient housing market and a high share of homeowners. However, in Western industrialized countries the shares of home ownership differ significantly, ranging from 44 percent in Germany up to 82 percent in Spain. This difference can't be due to differences in wealth, since elderly German households are significantly wealthier than their Spanish counterparts. Therefore important factors seem to be differences in demographic structures, taxation and housing policies and mortgage markets.The current project aims to develop a simulation model with overlapping generations which allows to isolate the central factors affecting individual tenure decision as well as the impact of different policy instruments on housing markets, individual welfare and efficiency. Starting point are existing studies by Chambers, Garriga and Schlangenhauf (2009) which analyze the interaction between housing markets, government and society with a dynamic cohort model. During working years individuals are facing income uncertainty and after entering retirement they cannot cover longevity risk. The current project intends to extend previous work into three directions. First, we will implement a transition path between long run equilibria in order to account for intergenerational welfare effects and aggregate economic efficiency. Second, we introduce long term care and health risks, in order to analyze the insurance properties of housing in old age. Third, we will disaggregate the supply side of the economy in order to quantify sectoral distortions of housing policies.

• DFG Programme: Research Grants