Valuing Homeownership

• Published in: The journal of real estate finance and economics Vol. 43; no. 4; pp. 491 - 504
• Main Authors: Sekkat, Khalid, Szafarz, Ariane
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.11.2011; Springer Nature B.V
• Subjects: Costs; Decision making; Diversification; Economic models; Economic theory; Economics; Economics and Finance; Equilibrium; Expected utility; Externality; Financial Services; Home ownership; Households; Houses; Housing; Investment analysis; Portfolio diversification; Portfolio management; Property values; Real estate; Real estate market; Regional/Spatial Science; Studies; Taxation; Value; Belgium; Brussels Belgium; R21; Homeownership; E21; G11; Tenure choice; Housing; Real-estate
• ISSN: 0895-5638; 1573-045X
• DOI: 10.1007/s11146-009-9212-0

Housing tenure decision combines financial, economic and socio-psychological factors. This paper considers the global premium associated to homeownership. On the one hand, homeownership is associated to private benefits of being an owner. On the other hand, overinvestment in housing is harmful to diversification and distorts portfolio management. This trade-off, similar to the one associated to corporate private benefits of control, is the cornerstone of our theoretical model based on the expected utility maximization. The originality of the model comes from its simplicity. Furthermore, the empirical implementation of the model, using price and rent data normalized by square-meter, exhibits a homeownership premium for houses in the Brussels Region reaching at least 9% of the housing price. The findings are robust to several methodological refinements. In particular, they confirm the link between liquidity constraints and house prices documented in the literature. However, the premium may largely vary from one place to another, according to tax laws, cultural habits and social status associated to tenure.