Borrowing Constraints, Home Ownership and Housing Choice: Evidence from Intra‐Family Wealth Transfers

• Published date: 01 March 2019
• Author: KRISTIAN BLICKLE,MARTIN BROWN
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/jmcb.12566

DOI: 10.1111/jmcb.12566

KRISTIAN BLICKLE

MARTIN BROWN

Borrowing Constraints, Home Ownership and

Housing Choice: Evidence from Intra-Family

Wealth Transfers

We study the impact of borrowing constraints on home ownership and

housing demand by comparing the tenure choice and housing quality of

consumers who receive intra-family wealth transfers to those that do not.

Our analysis is based on household-level panel data providing information

on the receipt of wealth transfers, changes in tenure status as well as changes

in the size and quality of housing. On average we find that the receipt of

a wealth transfer increases the propensity of consumers to transition from

renters to home-owners by 6–8 percentage points (35% of the sample mean).

Additional analyses suggest that this effect is unlikely to be drivenby wealth

effects and can thus be attributed to the relaxation of borrowingconstraints.

By contrast, wealth transfers do not increase the likelihood that existing

homeowners “trade-up” to larger homes in better locations.

JEL codes: D14, D31, D91, G18

Keywords: Borrowing constraints, wealth transfers, home ownership,

macroprudential policy.

We gratefully acknowledge comments by Zeno Adams, Giorgia Barboni, Mariela Dal Borgo,Robert

DeYoung,Mariacristina De Nardi, Christian Ehmann, Piet Eichholtz, Roland F ¨

uss, Andreas Fuster, Xavier

Freixas, Emilia Garcia-Appendini, Michael Haliassos, Tullio Jappelli, Michael Lechner, David Ling,

Steven Ongena, Isabel Schnabel, and Thomas Spycher.We further acknowledge comments from seminar

participants at the University of St. Gallen, Universita della Svizerra Italiana, and Goethe University

Frankfurt as well as participants at the following conferences: Modena Netspar Workshop 2015, Central

Bank of Ireland Conference on Macroprudential Policy, Young Swiss Economists Meeting 2016, Swiss

Society of Economics and Statistics 2016,European Economic Association meetings 2016, IBEFA summer

meetings 2017, Swiss Winter Conference on Financial Intermediation 2017, and 3rd IWH-FIN-FIRE

Workshop on “Challenges to Financial Stability 2017.

The views expressed are those of the authors and do not necessarily reflect the position of the Federal

Reserve Bank of New Yorkor the Federal Reserve System. All errors are the authors’.

KRISTIAN BLICKLE is at FederalReserve Bank of New York(E-mail: kristian.blickle@ny.frb.org). MARTIN

BROWN is at University of St. Gallen (E-mail: martin.brown@unisg.ch).

Received September 6, 2016; and accepted in revised form July 19, 2018.

Journal of Money, Credit and Banking, Vol.51, Nos. 2–3 (March–April 2019)

C

2018 The Authors. Journal of Money, Credit and Banking published by Wiley Periodicals,

Inc. on behalf of Ohio State University

This is an open access article under the terms of the Creative Commons Attribution-NonCom-

mercial License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited and is not used for commercial purposes.

540 :MONEY,CREDIT AND BANKING

ECONOMIC THEORY STIPULATESTHAT—IN A WORLD of frictionless

credit markets—permanent income and preferences govern a household’s consump-

tion of durable and nondurable goods (Deaton 1992). However, if credit markets are

imperfect, a household’s consumption plan may be limited by currently available

income and wealth. Home ownership, in particular, is affected by borrowing con-

straints. Limitations on loan-to-value ratios (LTV) imply that, in order to obtain a

residential mortgage, a household must have accumulated sufficient savings to make

an initial down-payment. Thus, conditional on permanent income and preferences,

households that receive wealth transfers earlier on in life, rather than later, may buy

a house at a younger age.1

In this paper, we examine the impact of intra-family wealth transfers on home

ownership and household demand using household-levelpanel data from Switzerland.

Our sample includes 4,958 households, for an average of 7 years each, between 2002

and 2012. Wefirst study 2,615 households that do not own a home when first observed.

We examine the propensity of these households to transition to ownership while in

our sample. Further, we study 2,343 existing homeowners and examine whether they

“trade-up” (i.e., move to larger homes in better locations). Werelate changes in tenure

status and housing quality to the receipt of wealth transfers by the household during

the observation period.

We account for differences in preferences and expected permanent income by

matching households on an extensive set of socio-economic indicators, including la-

bor income, education, and measures of the economic background of a respondent’s

parents. Moreover, our household-level panel data allow us to control for life-cycle

events (e.g., taste-shifters such as marriage, childbirth, etc.) that may change de-

mand for housing. We control for differences in housing affordability by matching

our household-level panel data with regional information on price-to-rent ratios. To

account for possible endogeneity in the timing of intra-family wealth transfers, we

perform a set of robustness tests in which we instrument the timing of wealth transfers

with deaths within the closer family.

We perform three tests to disentangle the extent to which wealth transfers may

not only relax borrowing constraints, but also induce a revision of permanent income

expectations. First, we benchmark the effect of one-time wealth transfers to compa-

rable changes in annual income. Second, we analyze the impact of wealth transfers

for households with high versus low expected permanent income. Our conjecture is

that for households with high expected permanent income (e.g., with wealthy parents

and high education) a wealth transfer of a given size is less likely to lead to a revision

of permanent income. Third, we replicate our baseline estimates across different age

groups. Our conjecture is that older households have more precise estimates about

1. The same reasoning applies of course to households that receive a larger share of their lifetime

human capital income early on in life.

KRISTIAN BLICKLE AND MARTIN BROWN :541

the size of anticipated wealth transfers—and are thus less likely to be affected by

unexpected wealth effects.

Our baseline estimates show that—among initial renters—receiving a wealth trans-

fer (of any size) is associated with a 6%–8% point higher propensity to transition to

ownership. The magnitude of this average treatment effect is remarkable, given that

23% of the households in our sample transition from renters to homeowners during

the observation period. Examining the effect of different sizes of wealth transfers we

find that a transfer of 25’–50’ CHF (50’–100’ CHF) is associated with a 13 percent-

age point (17 percentage point) higher propensity to transition to ownership among

initial renters.

Our three tests suggest that the effect of wealth transfers on housing are unlikely

to be driven by wealth effects and thus can attributed to the relaxation of borrowing

constraints: First, the estimated effect of a wealth transfer is 50 times larger than

the effect of a similar increase in wage income. Second, the estimated effect of

a given wealth transfer is similar among households with low and high expected

permanent income. Third, the estimated effect of a given wealth transfer is similar

among younger and older households. In fact, when compared to the subsample

mean, wealth transfers induce a slightly larger effect among older households.

We find no evidence that wealth transfers induce existing homeowners to trade up

to larger homes or homes in better neighborhoods. This result is consistent with two

key features of the housing market in Switzerland that also hold in further European

countries (e.g., Germany): Low rates of home ownershipand a comprehensive market

for rental properties.2These features of the housing market imply that households,

which do not have the wealth required to make a down payment on their preferred

home, may be able to rent that home instead of buying a smaller home in a less

attractive area.

The impact of borrowing constraints on home ownership has recently received in-

creased attention in light of macroprudential policies designed to reduce systemic risk

in the banking sector. In the aftermath of the 2007–2009 financial crisis, regulators

in Spain, Norway, Sweden, Hong-Kong, and many other countries have introduced

policies that tighten borrowing constraints in the residential mortgage market (Duca,

Muellbauer, and Murphy 2010, Hong Kong Monetary Authority 2011, de Lis et al.

2013, ESRB 2016). The introduction of these macroprudential policies has been ac-

companied by concerns that especially younger households may find it more difficult

to enter the housing market.3

In light of these policy discussions, Switzerland provides an interesting economic

environment to study the effect of wealth constraints on home ownership. In recent

years, Switzerland has witnessed a strong appreciation of house prices combined

with a fast increase in mortgage lending. Between 2000 and 2017, the volume of

2. Home ownership rates in Switzerland stand just over 40% and in Germany they

hover between 41% and 48% (Eurostat; QZ http://qz.com/167887/germany-has-one-of-the-worlds-

lowest-homeownership-rates/).

3. http://www.irishtimes.com/business/economy/noonan-wants-review-of-first-time-mortgage-cap-

1.2355909.