Presentation of the paper :

Housing Tenure as an Insurance Device  

Speaker:

Filippo Scoccianti

Banca d'Italia

Abstract

In this paper we study how housing tenure affects the level of households' insurance against persistent and transitory earnings shocks. To this end, we build an overlapping generations model with housing, where households are heterogeneous with respect to age, financial and housing savings, income, and face idiosyncratic house price shocks. Households choose non-housing and housing consumption, housing tenure, and financial assets. We calibrate the model to Italian data and show that it reproduces quite well the non-housing consumption insurance observed in the data. The tenure choice affects insurance possibilities through two main channels. While homeowners benefit from accessing collateralized debt, renters benefit from smaller transaction costs that allow them to easily adjust their housing consumption in response to an income shock. We find that a mixed-tenure economy, where households have the option to own or rent, provides a higher level of insurance against persistent earnings shocks than either an economy where households are all owners or all renters. Instead, in the case of insurance against transitory shocks, middle-aged households achieve a higher level of insurance in a pure owners economy, as the illiquidity of the housing assets induces an inaction region where, for small and transitory income shocks, households prefer to leave their housing and non-housing consumption unchanged. We then consider two housing policies aimed at increasing the level of homeownership in the economy: a decrease in housing transaction costs versus a reduction in housing maintenance costs. We find that the first policy, by reducing the distortions related to housing allocation, generates a higher level of insurance.

Coauthors:  Valentina Michelangeli (Banca d'Italia) and Giacomo Rodano (Banca d'Italia)