ArticlePublisher preview available

Starter Home Premium and Housing Affordability

DOI:10.1007/s11146-022-09935-8
Authors:
Siu Kei Wong at The University of Hong Kong
Siu Kei Wong
Kuang Kuang Deng
Kuang Kuang Deng
Kuang Kuang Deng
  • This person is not on ResearchGate, or hasn't claimed this research yet.
Ka Shing William Cheung at University of Auckland
Ka Shing William Cheung
Read publisher preview
Download citation
To read the full-text of this research, you can request a copy directly from the authors.

Abstract and Figures

Capital constraints are a major obstacle that holds back cash-poor households from purchasing a home. A workaround is to compromise the housing size and quality by buying a starter home one can marginally afford first. This study aims to investigate how capital constraints distort the pricing of starter homes. In Hong Kong, the government builds subsidized starter homes, which can be resold either to any households at full market prices through the privatized submarket or to households of limited affordability at lower prices through the affordable submarket. The subsidy in the latter case comes from the equity contribution of the government. If there were no capital constraints, the price gap between the two submarkets should simply be the government’s equity. However, our empirical analysis reveals a much smaller price gap, indicating that households with limited affordability are willing to pay a starter home premium in order to relax their capital constraints. Our estimation shows that the premium is in the range of 4.5% to 6.8%, and enlarges when the housing market becomes more unaffordable. The pricing of starter homes is based not only on their quality but also on their ability to relax capital constraints.
Figures - available from: The Journal of Real Estate Finance and Economics
This content is subject to copyright. Terms and conditions apply.
  • A preview of this full-text is provided by Springer Nature.
  • Learn more
Preview content only
Content available from The Journal of Real Estate Finance and Economics
This content is subject to copyright. Terms and conditions apply.
Vol.:(0123456789)
The Journal of Real Estate Finance and Economics
https://doi.org/10.1007/s11146-022-09935-8
1 3
Starter Home Premium andHousing Affordability
SiuKeiWong1 · KuangKuangDeng2 · KaShingCheung3
Accepted: 22 November 2022
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature
2022
Abstract
Capital constraints are a major obstacle that holds back cash-poor households from
purchasing a home. A workaround is to compromise the housing size and quality
by buying a starter home one can marginally afford first. This study aims to inves-
tigate how capital constraints distort the pricing of starter homes. In Hong Kong,
the government builds subsidized starter homes, which can be resold either to any
households at full market prices through the privatized submarket or to households
of limited affordability at lower prices through the affordable submarket. The sub-
sidy in the latter case comes from the equity contribution of the government. If there
were no capital constraints, the price gap between the two submarkets should simply
be the government’s equity. However, our empirical analysis reveals a much smaller
price gap, indicating that households with limited affordability are willing to pay
a starter home premium in order to relax their capital constraints. Our estimation
shows that the premium is in the range of 4.5% to 6.8%, and enlarges when the hous-
ing market becomes more unaffordable. The pricing of starter homes is based not
only on their quality but also on their ability to relax capital constraints.
Keywords Capital constraint· Credit rationing· Starter homes· Housing ladder·
Housing subsidy
JEL Classification H81· E51· R38
* Kuang Kuang Deng
deng.kuangkuang@mail.sufe.edu.cn
Siu Kei Wong
skwongb@hku.hk
Ka Shing Cheung
william.cheung@auckland.ac.nz
1 Department ofReal Estate andConstruction, University ofHong Kong, Pokfulam Road,
HongKong, HongKong
2 School ofPublic Economics andAdministration, Shanghai University ofFinance
andEconomics, Shanghai, China
3 Department ofProperty, University ofAuckland, Auckland, NewZealand
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
ResearchGate has not been able to resolve any citations for this publication.
Residential Mobility Decisions in Japan: Effects of Housing Equity Constraints and Income Shocks Under the Recourse Loan System
Article
Full-text available
  • Jul 2010
This paper draws on six waves of Japanese household longitudinal data (Keio Household Panel Survey, KHPS) and estimates a conditional fixed effects logit model to investigate the effects of housing equity constraints and income shocks on own-to-own residential moves in Japan. By looking at contemporaneous extended Loan-to-Value (ELTV) and extended Debt-to-Income (EDTI) ratios under the recourse loan system, we examine whether housing equity constraints and negative income shocks have any impact on own-to-own residential moves. Taking account of the specific nature of the recourse loan system in Japan, we further investigate whether these effects are different between positive and negative equity households. The estimation results show that housing equity constraints and negative income shocks significantly deter own-to-own residential moves for positive equity households. KeywordsResidential mobility–Housing equity constraint–Conditional fixed effects logit model–Loan-to-value ratio–Debt-to-income ratio–Negative equity–Japan–Recourse loan
View
Policy responses to an overheated housing market: Credit tightening versus transaction taxes
Article
Among Asian economies, Hong Kong has experienced the highest real growth in house prices since the 2010s. Two macroprudential measures, namely credit tightening (loan-to-value ratio cap) and transaction taxes (stamp duty), were introduced to cool down the overheated housing market. This study examines and compares their effectiveness based on a set of constant-quality house price indices. Through an error correction model, we find that credit tightening was able to curb house price growth in the high-price segment, while transaction taxes could not. An explanation is that the exemptions from transaction taxes for those with genuine housing needs could be abused by other market participants. It is easier for buyers to exploit the exemptions to get around the stamp duty than to manipulate the property valuation for mortgage lending. The implication is that the effectiveness of macroprudential measures hinges on whether compliance or exemption can be easily monitored and enforced.
View
Does Juan Carlos or Nelson Obtain a Larger Price Cut in the Spanish Housing Market?
Article
Using a unique dataset and a nonparametric decomposition, we determine whether immigrants with native names, immigrants with foreign names, and natives have different outcomes in Spain’s housing market. Results suggest that immigrants with native names achieve greater discounts relative to immigrants with non-Spanish names. As a robustness check, we prove that this is not due to the country of birth. We observe that most of the difference in price across immigrant groups remains unexplained, which may imply some form of discrimination (pure or statistical) against immigrants with non-native names.
View
Housing wealth effects for private and subsidized homeowners
Article
Purpose This paper aims to examine the effect of housing wealth on household consumption when there are resale and refinancing constraints that prevent housing assets from being cashed out. Design/methodology/approach Based on Household Expenditure Survey data in Hong Kong from 1999 to 2010, regression analysis is applied to compare the housing wealth effects of private and subsidized homeowners. Propensity score matching is adopted to ensure that the two groups of homeowners share similar household income. Further regression analysis is conducted to examine private homeowners’ consumption when their recourse mortgages are in negative equity. Findings Subsidized homeowners, who are not allowed to resell their units before sharing their capital gain with the government, experienced an insignificant housing wealth effect. While private homeowners experienced a significant housing wealth effect, the effect was weakened in the presence of a resale constraint induced by negative equity. The results remain robust after the application of more rigorous sample selection through propensity score matching. Research limitations/implications The analyses are subject to two potential data limitations. One is a relatively small sample size. The other is that data on financial assets and mortgages are unavailable and have to be indirectly controlled through household characteristics. Nevertheless, our estimated marginal propensity to consume out of housing wealth is 0.03 of the annual household consumption for private homeowners, which is within the range of estimates reported in previous literature. Practical implications This study shows that the housing wealth effect enjoyed in the private sector does not necessarily apply to the subsidized sector where resale and refinancing constraints exist. This is not to suggest that the constraints be removed. Rather, policymakers should be aware of the tradeoff: while the constraints ensure that government subsidies are used to assist home ownership, not capital gain, they also bring about consumption inequality in a society, especially in a booming housing market. Originality/value Our findings extend the literature on the housing wealth effect, which has been exclusively focusing on private homeowners, to subsidized homeowners. This study also adds to the literature on housing welfare by highlighting that the resale constraints of subsidized housing can weaken the housing wealth effect.
View
Market Thickness and the Impact of Unemployment on Housing Market Outcomes
Article
A search-and-matching model is developed to study how unemployment influences the housing market in the presence of the thick-market effect. A structural estimation of the model is conducted based on Texas city-level data that covers three years—1990, 2000 and 2010. Simulations help clarify how much the thick-market effect amplifies the impact of unemployment. A three-percentage-point increase in the unemployment rate lowers the price by 10.74% and reduces the transaction volume by 5.49%. Incorporating a feedback mechanism from housing prices to unemployment strengthens the amplification magnitude of the thick-market effect.
View
Racial and Ethnic Price Differentials in the Housing Market
Article
  • Jul 2017
Constrained choice sets due to discrimination in the housing market should, as Becker noted, lead minorities to pay higher prices for comparable housing. This paper tests for the presence of such racial and ethnic price differentials using a rich new dataset that covers two million repeat-sale housing transactions from four major metropolitan areas. Our analysis applies a repeat-sales framework, including house and neighborhood-by-time fixed effects to control for unobserved differences in the quality of homes and their associated neighborhoods. The results indicate that black and Hispanic homebuyers pay premia of around 2 percent on average across the four cities – differences not explained by variation in buyer income or access to credit. Further, we show that black and Hispanic buyers pay significant premia regardless of the race or ethnicity of the seller. Such racial/ethnic disparities in the prices paid for comparable homes have implications for the persistence of racial differences in home ownership, neighborhood segregation, and the dynamics of wealth accumulation.
View
Financial position and house price determination: An empirical study of income and wealth effects
Article
This paper examines the effect of the relative financial position of buyers and sellers on house prices, distinguishing between income and wealth effects. Using administrative data from the Netherlands (2006-2010) that combine transaction data, house characteristics, and household characteristics of both buyers and sellers, the estimates indicate that a better financial position leads to higher prices for buyers and lower prices for sellers. It provides evidence that income and wealth influence housing market behavior of buyers and sellers. The results are consistent with theories that suggests that higher income and wealth lead to higher search and bargaining costs, implying that households with better financial positions invest less time and effort in search and bargaining leading to worse bargaining outcomes.
View
Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
Article
  • Oct 2001
We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria that replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overreaction, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S.
View
Credit Supply and House Prices: Evidence from Mortgage Market Segmentation
Article
  • Aug 2012
We show that easier access to credit significantly increases house prices by using exogenous changes in the conforming loan limit as an instrument for lower cost of financing. Houses that become eligible for financing with a conforming loan show an increase in house value of 1.16 dollars per square foot (for an average price per square foot of 220 dollars) and higher overall house prices controlling for a rich set of house characteristics. However, these estimated coefficients are consistent with a local elasticity of house prices to interest rates that is lower than some previous studies proposed (below 10). In addition, loan to value ratios around the conforming loan limit deviate significantly from the common 80 percent norm, which confirms that it is an important factor in the financing choices of home buyers. In line with our interpretation, the results are stronger in the first half of our sample (1998-2001) when the conforming loan limit was more important, given that other forms of financing were less common and substantially more expensive. Results are also stronger in zip codes where personal income growth is low or declining, and in regions with lower elasticity of housing supply.
View
House Prices and Credit Constraints: Making Sense of the US Experience*
Article
Most US house price models break down in the mid-2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions – the cyclically adjusted loan-to-value ratio for first-time buyers – into house price-to-rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.
View