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Housing and the Household Wealth Portfolio: The Role of Location

  • Marion Kohler

    (Reserve Bank of Australia)

  • Kylie Smith

    (Reserve Bank of Australia)

There is little doubt that cities can provide many benefits, such as greater employment and business opportunities, which tend to result in higher income and wealth for urban households. In addition, there may be a number of non-pecuniary benefits, including greater access to education, infrastructure and services. But these benefits are accompanied by an urban premium on house prices, thus possibly affecting the composition of the asset portfolios of households living in different locations. Using a recent cross-section of wealth data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey we test whether urbanisation, when controlling for other factors, has a significant effect on the share of assets that households hold in housing. For owner-occupiers, the effect is found to be significant and positive, suggesting that housing is more expensive in larger cities even once we allow for the higher incomes and asset holdings of these households. In fact, the effect is quite large with a 100 person per square kilometre increase in urbanisation increasing the share of assets held in the home by 0.4 percentage points, on average. Further, we find that this effect is not linear but declines at higher levels of urbanisation. Hence, for example, for an average owner-occupier household moving from Cairns to Brisbane city – an increase in urbanisation of around 2 000 persons per square kilometre – the increase in their housing share of total assets is estimated to be 5.6 percentage points.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-10.

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Date of creation: Dec 2005
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Handle: RePEc:rba:rbardp:rdp2005-10
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  1. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-26, April.
  2. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
  3. Richard Voith, 1996. "The suburban housing market: effects of city and suburban employment growth," Working Papers 96-15, Federal Reserve Bank of Philadelphia.
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  6. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June.
  7. William N. Goetzmann & Massimo Massa & Andrei Simonov, 2004. "Portfolio Diversification and City Agglomeration," NBER Working Papers 10343, National Bureau of Economic Research, Inc.
  8. Poterba, James M. & Samwick, Andrew A., 2003. "Taxation and household portfolio composition: US evidence from the 1980s and 1990s," Journal of Public Economics, Elsevier, vol. 87(1), pages 5-38, January.
  9. Edward L. Glaeser & David C. Mare, 1994. "Cities and Skills," NBER Working Papers 4728, National Bureau of Economic Research, Inc.
  10. Rosen, H.S.Harvey S. & Wu, Stephen, 2004. "Portfolio choice and health status," Journal of Financial Economics, Elsevier, vol. 72(3), pages 457-484, June.
  11. Rapaport, Carol, 1997. "Housing Demand and Community Choice: An Empirical Analysis," Journal of Urban Economics, Elsevier, vol. 42(2), pages 243-260, September.
  12. Marion Kohler & Anthony Rossiter, 2005. "Property Owners in Australia: A Snapshot," RBA Research Discussion Papers rdp2005-03, Reserve Bank of Australia.
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