To Buy or Not to Buy: Household Risk Hedging of Housing Costs

Abstract

This study studies Chinese households’ decision between buying or renting a primary residence from a risk hedging perspective. Although homeownership means bearing house price risk, it eliminates exposure to rent risk. Our empirical results suggest that the homeownership rate increases with the rent volatility of living areas and decreases with the probability of move. However, households no longer hedge against the rent risk when owning a second house, which is often purchased as an investment property. Furthermore, we investigate households with heads aged over 60. Due to finite life expectancy, the rent hedging benefit of owning is weakened.