European Central Bank working paper finds homeownership gaps driven by house price expectations and rental market wedges

The European Central Bank published an ECB Working Paper examining why homeownership rates and housing wealth differ sharply across France, Germany, Italy, Spain and the United States, using an estimated life-cycle model in which households choose between renting and owning illiquid housing. The analysis concludes that cross-country differences are primarily explained by house price expectations and housing-market institutions, with preference differences playing a smaller role. On homeownership, the paper highlights the role of (i) beliefs about long-run house price growth and (ii) the “rental wedge”, defined as the difference between rents and housing maintenance costs and interpreted as capturing rental-market quality and segmentation between rental and owner-occupied markets. In the model, a 1 percentage point difference in long-run house price beliefs is associated with roughly a 15 percentage point difference in the homeownership rate, and a 2 percentage point difference in rental wedges implies roughly a 25–30 percentage point homeownership gap between Germany and Italy; estimated rental wedges range from about 2% in France and the United States to 2.8% in Germany, 3.7% in Spain and nearly 5% in Italy. On the value of housing wealth among homeowners, estimated housing maintenance costs are the dominant driver, because they reduce the effective return on holding housing. The model’s maintenance-cost estimates range from 1.7% of housing wealth in Italy and 2.6% in Germany to 4.9% in Spain, 6.0% in France and 8.6% in the United States, and the paper links these differences to large cross-country variation in housing wealth-to-income ratios over the life cycle.