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On the Negative Relationship between Labor Income Uncertainty and Homeownership: Risk Aversion vs. Credit Constraints

  • Diaz-Serrano, Luis


    (Universitat Rovira i Virgili)

Barriers to homeownership have traditionally been an important research and policy issue. In particular, the role of income volatility and credit constraints have been one of the main focuses in this concern. In this paper we test for the first time whether the underlying nature behind the negative effect of income uncertainty on the owner-occupancy propensities is driven by risk aversion, as it is assumed in most of the theoretical models, or on the contrary it is driven by credit constraints. The former question emerges from the plausible assumption that households facing higher income volatility are also expected to face borrowing constraints. To disentangle this puzzle, we use an unusually rich data coming from the Italian Survey of Household Income and Wealth carried out by the Bank of Italy. Our results confirm that in Italy both labor income uncertainty and credit constraints exert a significant negative effect on the probability of homeownership. Our main findings indicate that the negative relationship between labor income uncertainty and the owner-occupancy propensities are just driven by households’ risk aversion, while credit constraints play no role.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1208.

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Length: 28 pages
Date of creation: Jul 2004
Date of revision:
Publication status: published in: Journal of Housing Economics, 2005, 14 (2), 109-126
Handle: RePEc:iza:izadps:dp1208
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  1. Irina Barakova & Raphael Bostic & Paul Calem & Susan Wachter, 2003. "Does Credit Quality Matter for Homeownership?," Working Paper 8608, USC Lusk Center for Real Estate.
  2. Christofides, Louis N. & Stengos, Thanasis & Swidinsky, Robert, 1997. "On the calculation of marginal effects in the bivariate probit model," Economics Letters, Elsevier, vol. 54(3), pages 203-208, July.
  3. Jianakoplos, Nancy Ammon & Bernasek, Alexandra, 1998. "Are Women More Risk Averse?," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 620-30, October.
  4. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
  5. Guiso, Luigi & Paiella, Monica, 2001. "Risk Aversion, Wealth and Background Risk," CEPR Discussion Papers 2728, C.E.P.R. Discussion Papers.
  6. DeSalvo, Joseph S. & Eeckhoudt, Louis R., 1982. "Household behavior under income uncertainty in a monocentric urban area," Journal of Urban Economics, Elsevier, vol. 11(1), pages 98-111, January.
  7. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
  8. Brunello, Giorgio, 2000. "Absolute Risk Aversion and the Returns to Education," IZA Discussion Papers 192, Institute for the Study of Labor (IZA).
  9. Gwilym Pryce & Margaret Keoghan, 2002. "Unemployment insurance for mortgage borrowers: is it viable and does it cover those most in need?," European Journal of Housing Policy, Taylor and Francis Journals, vol. 2(1), pages 87-114, April.
  10. Haurin, Donald R. & Gill, H. Leroy, 1987. "Effects of income variability on the demand for owner-occupied housing," Journal of Urban Economics, Elsevier, vol. 22(2), pages 136-150, September.
  11. Quercia, Roberto G. & McCarthy, George W. & Wachter, Susan M., 2003. "The impacts of affordable lending efforts on homeownership rates," Journal of Housing Economics, Elsevier, vol. 12(1), pages 29-59, March.
  12. Donald R. Haurin & Patric H. Hendershott & Susan M. Wachter, 1996. "Borrowing Constraints and the Tenure Choice of Young Households," NBER Working Papers 5630, National Bureau of Economic Research, Inc.
  13. Ross, Stephen L. & Tootell, Geoffrey M. B., 2004. "Redlining, the Community Reinvestment Act, and private mortgage insurance," Journal of Urban Economics, Elsevier, vol. 55(2), pages 278-297, March.
  14. Diaz-Serrano, L. & Hartog, J. & Skyt Nielsen, H., 2003. "Compensating Wage Differentials for Schooling Risk in Denmark," Economics, Finance and Accounting Department Working Paper Series n1271003, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  15. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
  16. Fu, Yuming, 1995. "Uncertainty, liquidity, and housing choices," Regional Science and Urban Economics, Elsevier, vol. 25(2), pages 223-236, April.
  17. Linneman, Peter & Megbolugbe, Isaac F. & Wachter, Susan M. & Cho, Man, 1997. "Do Borrowing Constraints Change U.S. Homeownership Rates?," Journal of Housing Economics, Elsevier, vol. 6(4), pages 318-333, December.
  18. Haurin Donald R. & Hendershott Patric H. & Kim Dongwook, 1994. "Housing Decisions of American Youth," Journal of Urban Economics, Elsevier, vol. 35(1), pages 28-45, January.
  19. Robst, John & Deitz, Richard & McGoldrick, KimMarie, 1999. "Income variability, uncertainty and housing tenure choice1," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 219-229, March.
  20. Diaz-Serrano, Luis, 2005. "Labor income uncertainty, skewness and homeownership: A panel data study for Germany and Spain," Journal of Urban Economics, Elsevier, vol. 58(1), pages 156-176, July.
  21. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, vol. 28(3), pages 639-647, July.
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