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A Life Cycle Model with Housing Tenure, Constrained Mortgage Finance and a Risky Asset under Uncertainty

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  • Zhechun He
  • Peter Simmons

Abstract

We analyse optimal housing tenure choice (rent, buy or buy to let), consumption and a four asset portfolio in a life cycle model with uncertain labour income and asset returns (with a safe asset). Each period borrowing is possible only via a mortgage which is backed by housing collateral and which is itself subject to a loan to value and loan to income constraint. There is a minimum scale for house ownership. We derive some general theoretical properties of the solutions and closed-form solutions for specific preferences. To quantify the impact of uncertainty we simulate life cycle paths across random return and income realisations.

Suggested Citation

  • Zhechun He & Peter Simmons, 2018. "A Life Cycle Model with Housing Tenure, Constrained Mortgage Finance and a Risky Asset under Uncertainty," Discussion Papers 18/18, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:18/18
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    Keywords

    Divorce; housing tenure; mortgage; life cycle;
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