FIN4722 ADVANCED HOUSEHOLD FINANCE

Lecture 6: Housing
 ROADMAP

1. Introduction

2. Housing for Investment

3. Socioeconomic Function of Government-backed Housing

Program

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 1. INTRODUCTION

IMPORTANCE OF HOUSING

• Housing is the largest component of household wealth, and plays an important

role in the economy

– For many Americans on the verge of retirement, housing wealth emerges as a crucial component of
net worth. This is true across educational levels and across all ethnic groups (Lusardi and Mitchell,
2007).

• Fluctuations in housing prices affect the macro economy through changes in

consumption and investment

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 1. INTRODUCTION

IMPORTANCE OF HOUSING
• Thus, an extensive literature surrounding housing in the form of

– Mortgages
• Demand, refinancing, default

– Impact of housing on banks

• A large portion of a bank balance sheet comprises of mortgage and home equity loans

– Jobs

– Government revenue
• In the form of Land sales and stamp duties

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 1. INTRODUCTION
BUY OR RENT?
• The decision to buy or rent depends on various factors such as how housing prices
fluctuate.
– Correlation of housing market prices
If the homeowner sells his home and moves to a correlated housing market, the repurchase price is
partially hedged by the sale price, thereby reducing total asset price risk

– Growth in House Prices

Affects homeownership through two channels
• First, the liquidity constraint channel where a household will postpone buying a first home
because house prices increase substantially and consumption may have to be sacrificed to pay
for the down payment.
• Second, expectation channel where the household will buy a first home earlier as they expect
house prices to rise even faster in the future.

– Perception of House Pricing Risk

• People who perceive housing as risky investments are more likely to be renters than owners.

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 1. INTRODUCTION

BUY OR RENT?
• There are various implications of the buy and rent decision on households
– Homeowners amass more wealth than renters – forced to save
• Somerville, Teller, Farrell, Kasahara and Qiang (2007) find that renters have to be extremely
disciplined in investing the cost differences from homes into high yield high risk vehicles to be
ahead of home owners.
– Home ownership encourages people to care about neighbours and towns
• Thus, policymakers encourage homeownership by introducing:
– Tax Subsidy
• Gruber, Jensen and Kleven (2017) find that the tax subsidy changes home owners’ behavior on
the intensive margin by inducing them to buy larger and more expensive houses.
– Mortgage interest deductions
• Unfortunately, Glaeser and Shapiro (2003) as well as Gruber, Jensen and Kleven (2017) find that
mortgage interest deduction has no effect on homeownership in the US and Denmark
respectively.

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 1. INTRODUCTION
BUY OR RENT?
• The changing status from a renter to an
owner and upgrading of houses over time
is known as the housing ladder
• This is due to
– Changing Demographics
• Banks, Blundell, Oldfield and Smith (2015)
document that the housing ladder is due to
changing demographics over the life cycle as
individuals through marriage, child bearing
and old age
– House price volatility
• Households demand for housing early in life
to insure against fluctuation in house prices
• Increases in the minimum level of housing
demand result in an increase in the relative
utility of owning
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 2. HOUSING FOR INVESTMENT

• A house is a unique financial asset for various reasons:

– It is a joint consumption and investment
• A house is a consumption good from which the owner derives utility
• A house is also an investment vehicle that allows the investor to hold
home equity
– It is often highly leveraged and relatively illiquid
compared to stock and bonds

• Although housing is a necessity, the aggregate level of home

ownership may not be optimal from a portfolio point of view.
– For example, households with identical risk preferences hold different
financial assets portfolios because of the financial constraints imposed.

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 2. HOUSING FOR INVESTMENT
MOTIVES FOR HOUSEHOLD DEMAND FOR ASSETS
• Given that the home purchase decision is also a portfolio allocation decision.
• The decision to buy a home depends on reasons closely related to the investment
decision where:
– Labour uncertainty causes household to accumulate wealth in the form of a
home
• Amongst Italian households, Guiso, Jappelli and Terlizzese (1996) find subjective expectations of
labor income variance 12 months ahead reduces the share of illiquid and risky financial assets
• Among entrepreneurs, Heaton and Lucas (2000) find those with high and variable business
income hold less wealth in stocks.
• In Netherlands, Hochguertel (2002) argues that income uncertainty was less important compared
to financial asset holdings, age, education and tax incentives.
– Temperance where investments in home as a safe assets
– Demand for liquidity in the form
– Committed expenditure refers to the risk of committing to fixed nominal
payments over a long horizon
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 2. HOUSING FOR INVESTMENT

HOME OWNERSHIP OR STOCKHOLDING

• As a portfolio decision, the home ownership decision is also studied in close
relation to the investment decision

• For example, does home ownership explain the small proportion of wealth
invested?
– No: Labour uncertainty
• Bertaut and Haliassos (1997), Gollier and Pratt (1997), Viceira (2001), and Heaton and Lucas
(1996) show that the unavoidable risk in labor uncertainty and hence prudence is too small to
explain the stockholding puzzle

– Yes, Precautionary demand for liquidity and committed expenditure risk

• Fratantoni (1998) finds that committed expenditure risk is inversely correlated with
stockholding and sufficiently explains the stockholding puzzle.

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 2. HOUSING FOR INVESTMENT

HOME OWNERSHIP OR STOCKHOLDING

• Other reasons for the low stockholding may be from:
– Financial advisors and empirical studies ignoring the weightage of housing in
the portfolio decision
• Empirical Difficulties of dealing with frictions such as collateral requirements and liquidation
cost of real estate

– Constraints on home payments

• High leverage, and high ratio of real estate holding relative to net worth will lead to large
portfolio risks for younger households
• In response, they will invest less In stocks, bonds.
• Older households more likely to accumulate wealth, lower house value to net worth ratio, such
that they are willing to pay for stocks (Marjorie and Yamashita, 2002)

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 2. HOUSING FOR INVESTMENT

BOOM AND BUST IN HOUSE PRICES

• Home ownership affects other decisions in the household through various
channels

– Home appreciation as a form of speculative income.

– Market value of a house depending on factors such as

• distance to the city
• surrounding amenities
• well-kept neighborhood
• floor space
• lot size
• quality of construction

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 2. HOUSING FOR INVESTMENT

BOOM AND BUST IN HOUSE PRICES

• These shocks to housing prices affect household decisions where

– Consumption
• Mian, Rao and Sufi (2013) find that variation in housing prices affect household net worth
which led to the cut in consumption for low net worth households and highly levered
household

– Labor Productivity
• Gu, He and Qian (2018) document that house price increases raise shirking behavior and lower
labor productivity.

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 2. HOUSING FOR INVESTMENT
BOOM AND BUST IN HOUSE PRICES
• Given the impact of the 2008 subprime mortgage crisis, an overwhelming body of
studies explore why housing prices change
– Credit constraints
• Piazzesi and Schneider (2016) argue that consumers’ credit conditions and expectations are
crucial in explaining house price fluctuations.
• Cox and Ludvigson (2018) show that changes in credit supply is positively related with riskier
non-conforming debt in mortgage lending. In addition, credit supply is also found to be a strong
predictor of house price growth
– Expectations about home prices
• However, Kaplan, Mitman and Violante (2017) show that booms and busts leading up to the
2008 mortgage crisis is from shifting expectations about future house price growth which in
turn are responsible for half of the booms and busts in non-durable expenditures.
– Speculation
• Gao, Sockin and Xiong (2019) find that speculation amplifies house price appreciation during
2004 to 2009, where speculation drives increased employment, per capita income and business
establishments. However, it also magnifies the drop in house price during the housing bust,
with corresponding decline in employment, income and business establishments.
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3. SOCIOECONOMIC FUNCTION OF GOVERNMENT-BACKED
HOUSING PROGRAM

Public Housing Demolition (Move to

Opportunity)

• Case 1: Chicago

Large-Scale Public Housing (Home

Ownership for the People)

• Case 2: Singapore
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 Case 1. Chicago: moved to opportunity?

Move to opportunity: provide affordable housing

in high-opportunity areas

Chyn, E. (2018). Moved to Opportunity: the Long-Run Effects of Public Housing

Demolition on Children. American Economic Review 108(1): 3028-3056.

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 Public housing demolition in Chicago

• 1990s: Chicago had the 3rd largest public housing

system in the US; providing services to nearly 5% of
the city’s population

• Low-income households were eligible for public

housing if income at/below 50% of Chicago’s median
income

• Demolition began as a reaction to a serious housing

management problems by Chicago Housing Authority
(CHA)
– Jan 1999 pipes burst in the Robert Taylor projects
– Harsh winter weather damage in the Henry
Horner Homes project

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 Move to lower poverty neighborhoods

• Section 8 housing vouchers: allow recipients to rent housing on

the private market → CHA paid for all moving expenses and the
voucher subsidy was equal to the difference btw gross rent and
family’s required rent contribution

➔Compare young adult outcomes of displaced children to peers

who lived in nearby public housing that was not demolished

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 53 high-rise buildings located in 7 projects: 20
demolished (treated) buildings and 33 comparison
(control) group buildings not demolished

5,250 children from 2,767 households who were 7-

18 in the year of demolition
Data and
method
Track adult outcomes for 3-14 years afterwards
and compare between treated and control groups:

• Unemployment insurance wage records

• Arrest records
• Assistance files

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 Main findings

Nearly 44% of
treated households
lived in
neighborhoods with
poverty rates less
than 40% (threshold
of extreme poverty
neighborhood)

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employment and earnings by age of measurement

• More significant effect if displaced at young ages

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 Cost-benefit analysis
Relocating youth using vouchers is estimated
to increase pretax lifetime income by $12,000
in present value

Increase lifetime earnings about $24,000 for a

family with two children

Main cost comes from moving expenses

around $1,100 per family

Assuming 10% increase in tax revenue for relocating

children: government gain $1,300 (=$24,000 × 0.10
- $1,100) 23
 Case 2. Singapore

Can large-scale public housing promote upward mobility

for children born to less favoured families?

“Like Father Like Son? Social Engineering and Intergenerational Mobility in

Housing Consumption”. Sumit Agarwal, Yi Fan, Wenlan Qian, and Tien Foo Sing.
NUS working paper (2024)

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 Research questions

What is correlation in housing consumption across

generations?

Can public housing promote upward mobility for children

born to less advantaged families? How much?

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 Public housing in Singapore

National housing authority

1964-1990: 667,575
Housing & Development
“Home Ownership for the housing units;
Board (HDB) carried out
People Scheme” homeownership of 87% by
large-scale public housing
introduced in 1964 1990 (cover more than 2
constructions to build
million people)
affordable housing

New public housing sold at Criteria: household income

subsidized prices with ceiling 14,000 SGD (10,414
generous grants; up to USD) per month; sell at full
80,000 SGD (59,510 USD) market prices after 5 years
for first-time buyers of min occupation period

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 Public housing in Singapore

Large scale, high quality

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Housing locations
SINGAPORE POSTAL DISTRICT MAP
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 Big Data
• Residential Data
• Scope: address, housing type, and
demographics, from 1996 to 2018 for de-
identified residents
• Focus: 1965-1984 birth cohorts; at least 30
years old
• Parent-child pairs: 149,745 non-co-residing
pairs

• Housing Transaction Data

• Scope: public and private housing markets
from HDB & REALIS
• Period: 1995 – 2018 29
 3D joint density

• Ridge: children’s housing

consumption generally
close to parents’, upward
mobility for children born
to lower-end families

• Peak: highest persistence

among richest families

• Skirt: deviations from

parents’ ranks
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 2D graph

C H I L D ’ S H O U S I N G R A N K V S . PA R E N T S ’ H O U S I N G R A N K 31
 Heterogeneity
• Children born to parents at bottom 50 percentile ranks: 0.06 - high
(upward) mobility
• Children born to middle class (50-80 rank): 0.17 – downward mobility
• Children born to top 20-rank parents: 0.96 – high persistence in
housing consumption

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 Mosaic plots:
conditional on parents’ residential type

• Parents in public housing: 51.2%, 30.4% and

18.4% of their children end up in 0-50, 50-80,
80-100 ranks, respectively

• Parents in private housing: 51.5% of their

children stay in the 80-100 ranks; 25% and
23.5% end up in 0-50 and 50-80 ranks,
respectively

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 Mosaic plots：
conditional on housing locations

• Parents in non-central
regions: 50.2%, 30.1% and
19.7% of children end up in 0-
50, 50-80, 80-100 ranks,
respectively

• Parents in central regions: the

respective percentages are
40.5%, 26.3% and 33.2%

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Impact of public housing on child’s upward mobility

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Impact of public housing on child’s upward mobility

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Impact of public housing on child’s upward mobility

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Impact of public housing on child’s upward mobility

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Impact of public housing on child’s upward mobility

Parents living in public housing benefit from the BTO

scheme, which drives child’s upward mobility by 9.5%
(≈12 ranks), compared to private housing parents

Public housing parents not trade-off btw housing

consumption and other individual/household
consumption, but invest more in child’s human capital
after BTO

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 Summary and discussion

• Move to opportunity: provide affordable housing in high-opportunity

areas; e.g., public housing demolition & relocation with voucher

• Large-scale social engineering program in affordable public housing:

provide affordable housing and promote upward mobility for children
for general population

• Discussion: what is the socioeconomic function of BTO, with possibly

intended and unintended consequences?

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