The dynamics of housing tenure choice: Lessons from Germany and the United States

This paper investigates the likelihood and timing of housing tenure choice dynamics including both the initial transition to homeownership, and possible transitions back to rental tenure and to an additional owned home. This is done across the German Socio-Economic Panel (GSOEP) and the Panel Study of Income Dynamics (PSID). Further, housing price data is added for both countries. For the US, data from the Federal Housing Finance Agency (FHFA) and Census data were used construct measures of house price appreciation and the relative cost of owning to renting. For Germany, proprietary data from BulwienGesa AG was used to construct comparable indices. Observed differentials in tenure transitions appear to be consistent with the differences in housing and mortgage market conditions, as well as the tax treatment of owned homes across the two nations. In particular, while there is substantial house price appreciation in the US, on average house prices fall over the same period in Germany. In addition, mortgage interest is not tax deductible in Germany, alternative mortgage options available in the US are not prevalent there, and down payment requirements are much greater. Consequently, German households have a much lower probability of homeownership and there is only a small likelihood of those who initially achieve homeownership returning to rental tenure or moving to another owned home. In contrast, households in the United States have a very high likelihood of homeownership, but the housing market appears much more volatile with a high likelihood that households will return to rental tenure, and subsequently achieve homeownership for a second time during the period of observation.