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When homeownership and housing prices are no longer in sync

by Pedro Gete & Athena Tsouderou
Posted on July 25, 2019

Housing prices and homeownership were always strongly correlated, with demand for ownership being the main driver of housing prices. When demand was high, prices surged. New households usually financed part of the purchase with a mortgage to become new homeowners. Nearly all macroeconomics and finance studies focus on the homeowner as the driver of housing dynamics.

In our research, we show that the positive correlation between housing prices and homeownership rate1 broke down after the last financial crisis, known as the Great Recession (late 2007 until 2009, or even later for many EU countries). We do country per country analysis, and also study the housing market across various geographical areas.

The Euro area

Figure 1 shows the time series of the housing prices and homeownership rate. The two series increased together until 2009, when they both dropped. However, when the housing prices recovered after 2014, the homeownership rate kept decreasing. For the first time, prices were decoupled from homeownership. The driver of the recovery in housing prices did not come from households who wanted to become homeowners.


Figure 1. Housing prices and homeownership rate in the Euro area. Source: Eurostat.

Figure 2. Correlation of housing prices and homeownership rate in the Euro area. Source: Eurostat.

To better document this new situation, we directly plotted the correlation of housing prices and homeownership rate in the Euro area (Figure 2). Historically, this correlation has been positive. However, for the first time after 2012, this correlation is no longer positive. It continues to drop, reaching values close to minus one in 2016. In other words, home prices started to recover, but the number of households who owned their property did not increase. Prices and ownership decoupled in the Euro area.

This mismatch seems present in the U.S. and in a set of European countries as well, where the homeownership rate and the housing prices correlated pre-crisis but no longer did so after the Great Recession. As with any empirical fact, there are some exceptions, for example in the Netherlands or in France. We are now also checking the trends at city level.

Why this mismatch matters

The fact that homeownership and housing prices are no longer positively correlated is a crucial one, with major consequences. After all, mortgages are one of the most basic financial products of the banking industry. Given that homeowners traditionally borrow to buy a house, permanent falls in homeownership rates – even when prices are rising – may show structural changes in demand for this key banking product.

Also, changes in consumption induced by changes in housing prices are a key element of the monetary policy toolbox. If homeownership is decoupled from prices, that transmission channel breaks.

Finally, to understand the dynamics of housing prices, it is important to know who buys the housing stock.

“A potential cause could be the rise of the sharing economy, decreasing the demand for ownership”

Three potential causes

So why is it that the correlation between homeownership and housing prices has broken down? We found three potential causes:

  • Difficulty of access to credit by some households. Banks may have tightened their lending standards. Because they wanted to – or to satisfy stricter banking regulation requirements that were introduced after the last financial crisis. A more difficult access to credit, together with housing prices stickiness, makes homeownership rates fall permanently.
  • Changes in taste. It may be that bad experiences with homeownership during the last recession discourage certain households from ownership. Moreover, new technology encourages renting: the sharing economy (think of Uber and Airbnb) generates less demand for ownership of assets, and more demand for rentals – especially amongst younger generations.
  • A new global asset class. Following the last financial crisis, Central Banks bought relatively safe assets like government bonds in very large scales, in order to increase the money supply and boost the economy2. This policy caused the returns of those traditional investments to drop substantially. Real estate, on the other hand, became an excellent investment opportunity, since it now usually brought higher returns than the more traditional investments. Moreover, new technologies, like crowdfunding, and real estate investment trusts (REITs3) open up even more novel investment opportunities in the housing markets. People can now own parts of real estate, receiving parts of the rental income without having to purchase the full property.

If anything, it’s fair to say this area of research requires serious attention. We’ll be exploring in depth the potential causes of the permanent drop in homeownership rate and analyzing its impact on households and the banking industry. Stay tuned!

Pedro Gete is Associate Professor of Finance at IE Business School and IE University. Athena Tsouderou is Doctoral Candidate at IE Business School and IE University.

More information on this long-term research project and the authors can be found here.

Footnotes

  1. Homeownership rate is measured as the percentage of households who own the home they live in.
  2. This “unconventional” monetary policy tool is known as Quantitative Easing.
  3. A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. Most REITs are publicly traded on major exchanges