Housing markets, borrowing constraints and labor mobility (376)

Theme Track: Migration and Demographics - Housing

Authors:
Haavio, Markus ; Kauppi, Heikki

A well-functioning housing market, providing an adequate turnover of residential mobility, is important for the efficient matching of jobs within the labor market. Immobility caused by bottlenecks in the housing market can seriously inhibit the ability of the labor market to match vacancies with potential employees. Recently, many European researchers have asked whether the relatively high unemployment rates in countries like the UK and Spain can be explained by the fact that the majority of people in these nations owner-occupy their homes, while a small minority live in commercial rental housing. This question arises naturally, since the lowest rates of unemployment can be found from such contrasting countries as Germany and Switzerland where most people live in privately rented homes. A number of microeconometric studies also indicate that home-owners are more sluggish to move in response to changing labor market conditions than people who rent their homes. Despite the importance of the underlying policy questions, there does not yet exist a satisfactory theoretical analysis about the relative merits of owner occupation and rental housing in enhancing interregional mobility of households and labor.

This paper tries to fill a part of this gap in economic theory. We develop an intertemporal multi-region model with stochastic regional business cycles and idiosyncratic shocks changing individual agents'' match with the current job or technology. We then embed owner-occupation and rental housing markets into this framework, and analyze how these alternative arrangements allocate people in space and time. We show that rental markets always result in the socially optimal outcome, with the most productive people living in the booming regions in every period. Also owner-occupation is efficient if the boom never shifts, or if changes in regional fortunes are very frequent and people can protect themselves against (small) capital losses through precautionary saving.

Otherwise, however, the owner-occupied outcome is inefficient, as some agents are borrowing constrained, and cannot move to a booming region even when their current match is good. As a consequence housing prices are distorted, and also non-constrained workers typically follow non-optimal moving policies. In addition, option values affect the choice of location: high productivity agents with little wealth may fail to move to a booming region, if they fear that after a potential capital loss they are borrowing constrained and cannot live in a growth center in a later period when the match is even better. We use numerical methods to study in more detail the circumstances where owner-occupation is inefficient. With different specifications of regional and idiosyncratic shocks, we solve equilibrium housing prices, interest rates and the invariant wealth distribution. We study the size of the borrowing constrained group, and examined labor mobility and welfare losses. We also analyze some policy issues, including property taxation and the impact of different borrowing limits. Finally we discuss a number of empirical hypotheses implied by our theory.

[Home]    [Sitemap]