Renting versus Owning and the Role of Human Capital: Evidence from Germany

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Abstract

In a world with complete markets, the decision whether to rent or buy a home is not influenced by risks related to human capital. If markets are incomplete and have frictions, however, this may change. Renting should become more likely the more mobile a household has to be and the more income risk can be diversified. Using household panel data from Germany, we test both predictions. We find that mobility requirements have a positive effect on the probability of renting. This effect is robust even after controlling for state dependence, unobserved heterogeneity and other factors known to influence the tenure mode choice. Our data, however, does not support the hypothesis that the potential to diversify net income risk when renting affects the tenure mode choice.
Original languageEnglish
Pages (from-to)754-788
Number of pages34
JournalThe Journal of Real Estate Finance and Economics
Volume48
Issue number4
Early online date20 Apr 2013
DOIs
Publication statusPublished - May 2014

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Keywords

  • tenure mode choice
  • household mobility
  • background risk

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