Does homeownership promote wealth accumulation?

ABSTRACT

It is well known that homeowners are richer than renters, even after controlling for observable household characteristics. This is often used as an argument for policies that foster homeownership. However, the causal link between homeownership and wealth is difficult to establish due to many potential sources of endogeneity. Utilizing the Household Finance and Consumption Survey for the Euro area, we correct for endogeneity by using inheriting the household’ s main residence as an instrument. The exclusion restriction is that conditional on the total amount of inheritance, inheriting a home affects the wealth position of the household only through homeownership. For the sample of inheritors we find that the local average treatment effect for households that inherit a home and stay homeowners is negative. Owning a home reduces riches due to sizable reductions in the net holdings of financial and other real wealth of the treated households.

KEYWORDS:

• Homeownership
• wealth accumulation
• inheritance
• instrumental variables

JEL CLASSIFICATION:

• E21
• D14
• D31

Acknowledgement

We are grateful to Paula Gobbi, Oliver Lerbst, Monica Paiella, Sven Resnjanskij and Guido Schwerdt for their insightful comments. Vigile Fabella is thanked for providing excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplementary material

Supplementary data for this article can be accessed here.

Notes

¹ See Oliver and Shapiro (1990); Sherraden (1991); Retsinas and Belsky (2002) and Dietz and Haurin (2003) among others. Not all economists agree with this widely held view; indeed there is a recent controversial debate about the role of homeownership for wealth creation, see e.g. Shiller (2013).

² We also show that homeownership correlates positively with the non-residential components of wealth. For details, see Table A.5 in the Online Appendix, which can be found at georgikocharkov.com.

³ France is excluded from the analysis because French households do not properly report different types of inheritance.

⁴ Detailed information on sample sizes and population characteristics in each country is provided in Table A.3 in the Online Appendix.

⁵ The country-specific homeownership rates vary from 70 percent in the Netherlands to 97 percent in Italy in our sample of households with positive income and inheritance and head’s age above or equal to 35 years. For representative estimates of homeownership rates in Europe, see Kaas, Kocharkov, and Preugschat (2015).

⁶ The average net wealth of home inheritors and non-home inheritors is roughly equal if we do not condition on the homeownership status. For more details, see Table A.2 in the Online Appendix.

⁷ Various household characteristics for homeowners and renters are presented in Table A.1 in the Online Appendix.

⁸ Table A.2 in the Online Appendix presents the wealth composition and basic characteristics of the households which inherited their main residence versus households which received inheritance in other forms.

⁹ See the first stage regressions in the Online Appendix, Table A.4. The corresponding p-value on the instrumental variable coefficient is very close to zero (1.343e-20).

¹⁰ The identification conditions for LATE are derived in Imbens and Angrist (1994).

¹¹ In the presence of heteroscedasticity in transformed models, Manning (1998) advocates a correction procedure for computing the marginal effects in log models with normal residuals. We use this correction when interpreting the coefficients.

¹² We perform several robustness checks to further validate the result. First, we reduce the data sample to four core countries of the Euro zone: Germany, the Netherlands, Spain and Italy. Second, we estimate the effect of homeownership on wealth by excluding either the top 20 percent of wealthiest home inheritors in each country or the poorest 20 percent of non-home inheritors. In this way we try to bridge the gap between the two types of inheritors in terms of inherited amounts. The results solidify the negative effect of homeownership. See Tables A.6-A.8 in the Online Appendix.

¹³ The components of net wealth might take non-positive values. Therefore, we apply on the dependent variables the inverse hyperbolic sine transformation (IHS). For more details, see e.g. Burbidge, Magee, and Robb (1988).