Living under high inflation increases home ownership

People with periods of high inflation are more likely to buy a home, according to a new study from the University of California San Diego’s Rady School of Management.

The paper to be published in Finance Journal, uses various sources of data that reveal that households that have experienced hyperinflation are more likely to invest in real estate. The study indicates that many homeowners buy because they are motivated to protect themselves from future price increases.

The study is the first to reveal that personal experience with inflation drives homeownership.

said Alex Steiny Wellsjo, co-author of the study and assistant professor of economics and strategy at the Radi School. “People who have experienced high inflation in the past may expect higher inflation in the future, which makes them want to be homeowners. This is especially true if they can finance with a fixed-rate mortgage, which further protects them from future inflation.”

Wellsjo added that the repercussions of the high inflation that people are currently experiencing around the world will have a lasting impact on the housing markets.

“Our paper indicates that cohorts who live during the current period of inflation will have a higher demand for housing for years to come,” she said.

To find out how people make homeownership decisions, Wellsjo and co-author Ulrike Malmendier, associate professor in the Haas School of Business and Economics at UC Berkeley, conducted a new survey of 700 homeowners in six European countries (Austria, Germany, Ireland, Italy, Portugal and Spain).

Survey respondents were asked: what are their good reasons for buying a home, whether they have personally experienced high inflation, whether they are worried about future inflation and whether inflation has influenced their decision to buy a home.

Among those surveyed, 50% indicated that “real estate is a good investment if there is inflation.” People who experienced high inflation were 21% more likely to worry about future inflation and 74% more likely to say that inflation affected their decision to buy a home.

The authors also used data from the European Central Bank’s Household Finance and Consumption Survey of 220,000 households in 22 European countries, which revealed that the effects of inflation-controlled inflation are significant. For example, for a typical household, increasing their experiences of inflation from 2% to 5.4% would increase their probability of owning from 65% to 75%.

Household exposure to previous bouts of high or low inflation can help explain differences in the composition of homeownership within and between countries.

For example, in Germany and Austria, less than half of families own a home. But 85% or more are owned in Lithuania, Slovakia and Croatia, countries with a history of high inflation. Similarly, only 57% owned their homes in France, which used to have more price stability, but 82% owned their homes in neighboring Spain – a country with a long history of inflation.

“These families with similar demographics and in similar financial situations make systematically different tenure decisions,” write Wilsgow and Malminder. “While financial institutions play an important role, as do home prices, housing supply, and demographics, we show that the economic histories experienced by prospective homeowners, and especially inflation experiences, are powerful predictors of housing investment.”

The influence of personal experiences appears to be strong and long-lasting enough to influence even the homeownership decisions of immigrants who move into the new housing market and still respond to the exposure to inflation they experienced in their home countries.

Using data from the American Community Survey, Wellsjo and Malmendier identified heads of household who immigrated to the United States from outside the country. They were able to account for a family’s lifetime experiences of inflation during their time in their home country and in the United States and how this affected their purchasing decisions after immigration. Again, they found that heads of household who experienced high rates of inflation over their lifetime were more likely to be homeowners.

“We show that the relationship between past inflation and home purchase choices is not explained by housing market conditions, nor by indicators of current economic conditions or other economic experiences,” the authors write. “The effects of suffering high inflation have a long-term effect on homeownership.”