Examining Household-level Expectations on Housing Returns

In view of the dominance of housing in the average portfolio of private households, there is a striking paucity of empirical evidence concerning individual expectations on housing asset returns. Building on the well-developed literature on individual stock return expectations, e.g. Kilka and Weber (2000) or Kempf and Merkle (2014), this research aims at measuring individual expectations on housing returns. We attempt to disentangle two components of total housing returns: first, house prices rise and fall over time, giving rise to asset value gains and losses. Second, analogous to dividends for stocks, housing offers a cash flow in the form of (implicit) rents. The expectations regarding price appreciation yield and rent yield sum up to the total housing return expectations.In order to examining housing return expecations, we use the second wave of the Panel on Household Finances (PHF) conducted by the Deutsche Bundesbank. In this survey, around 4,500 German households are asked in detail about their financial situation. This includes the composition of their portfolio and questions like the rent they think to be able to charge for their own house as well as sociodemographic information.Based on households’ self-reported estimates regarding the present and future values of their own house and the implicit rental dividend on their house, we calculate total housing return expectations and analyze their cross-sectional distribution. The numerous items of the survey furthermore allow us to identify key factors influencing households’ expectations about house prices, rents and total housing returns.Total housing return expectations display a great amount of cross-sectional variation and are correlated to numerous socio-demographic characteristics, financial literacy and past experiences. Surprisingly, total housing return expectations are moderately negatively associated with the size of housing net wealth - households more heavily invested in housing tend to ask for lower returns. Homeowners who are also landlords are furthermore more pessimistic in their expectations about total housing returns and both of their components, possibly because they are more cautious and realistic due to higher experience in real estate markets. Households who constructed their main residence are also generally more pessimistic, possibly implying that they regard their house primarily as consumption good.