Household wealth accumulation: impact of tenure choice and home equity loans

• Main Author: Thang, Doreen Chze-Lin
• Language: English
• Published: 2009
• Subjects: Home ownership; Family - Economic aspects; Home equity loans
• Online Access: http://hdl.handle.net/2429/6212

The existing literature on household wealth accumulation has hitherto recognized the lifecycle effects, household socio-economic characteristics, bequest motives, and intergenerational transfers as important factors affecting household net wealth. The two empirical essays in this thesis expand the literature by emphasizing the likely roles that a household's tenure choice and home equity borrowing decisions have in its wealth accumulation process. The first essay, entitled "Homeownership and Household Wealth Accumulation", tests whether homeownership has placed the owner household on a more favorable wealth accumulation path, based on past observations that the values of owner-occupied housing have grown at a real rate greater than those of financial or other tangible assets. The premise is that, while the tenure choice decision is affected by a household's net wealth, the housing tenure chosen could place a household on different wealth accumulation paths over its life-cycle. Controlling for selection bias arising from tenure status, the results indicate that typical homeowners and renters have distinct wealth accumulation processes. While homeownership improves the wealth position of homeowners, the renter households are, however, better off in their existing tenure than otherwise. It appears that households self-select themselves into the appropriate tenure that optimizes their wealth accumulation paths. The second essay on "Household Consumption/Investment Behavior and Home Equity Loans" investigates which behavioral model underpins the homeowners' consumption and investment decisions of home equity loan funds, and how these decisions impact portfolio decisions and wealth accumulation. It concludes that the 'life-cycle model' and the 'precautionary savings model' prevail over the 'bequest motive model' in motivating the household consumption/investment decisions of home equity loans. Home equity loans alter the illiquid nature of housing investment through convenient tapping of housing equity, and reduce household preference to hold liquid assets to meet precautionary needs. Their presence encourages loan users to hold smaller shares of liquid cash and financial assets in total assets, and to diversify from housing asset to business, real estate and illiquid nonhousing assets. They generally reduce homeowners' net wealth, reflecting a tendency for borrowed funds to be consumed or invested in loss-incurring assets.