Modelling the demand for housing over the life cycle

• Published in: Review of economic dynamics 2012, Vol.15 (1), p.1-18
• Main Authors: Attanasio, Orazio P., Bottazzi, Renata, Low, Hamish W., Nesheim, Lars, Wakefield, Matthew
• Format: Article
• Language: English
• Subjects: Consumption; Credit constraints; Demand; Economic dynamics; Economic models; Housing; Housing prices; Income; Life cycles; Studies; Uncertainty
• ISSN: 1094-2025; 1096-6099
• DOI: 10.1016/j.red.2011.09.001

We model individual demand for housing over the life cycle, and show the aggregate implications of this behaviour. Individuals delay purchasing their first home when incomes are low or uncertain. Higher house prices lead households to downsize, rather than to stop being owners. Fixed costs (property transactions taxes) have important impacts on welfare (a wealth effect) and house purchase decisions (substitution effect). In aggregate, positive house price shocks lead to consumption booms among the old but falls in consumption for the young, and reduced housing demand; positive income shocks lead to consumption booms among the young and increased housing demand. We model individual demand for housing over the life cycle, and show the aggregate implications of this behaviour. We find: ► Individuals delay purchasing their first home when incomes are low or uncertain. ► Higher house prices lead households to downsize, rather than to stop being owners. ► Fixed costs have important impacts on welfare and house purchase decisions. ► In aggregate, house price increases consumption of the old and decreases it for the young. ► Positive income shocks lead to increases in consumption and housing demand for the young.