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The housing channel of intergenerational wealth persistence

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Ella Getz Wold discusses how wealth transmits across generations through the housing market.

Image courtesy of interviewee. February 6, 2024

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This video video discusses a study focused on the housing market, particularly in Norway, highlighting two key features motivating the research: high returns on housing investments and significant barriers to entry. Many individuals benefit from the housing market through high house price growth and leverage, with affluent parents often helping their children access homeownership. This video video early entry into the housing market can enhance future wealth and facilitate the transfer of wealth from parents to children.

The study relates to three areas of literature: intergenerational wealth persistence, transfers from parents to children, and the impact of early housing outcomes on later wealth. Using Norwegian tax data, the researchers explore how parent wealth influences children’s housing outcomes and subsequent wealth. They employ statistical methods to address two challenges: determining how parental wealth affects children's likelihood of homeownership and understanding how early homeownership impacts midlife wealth.

The findings indicate that children of wealthier parents are 15% more likely to become homeowners by age 30, and each additional year in the housing market increases midlife wealth by about $10,000. Housing accounts for nearly 15% of intergenerational wealth persistence, a significant influence comparable to parental impact on education and income.

The paper concludes that housing plays a crucial role in intergenerational wealth transmission and suggests that policymakers should focus more on housing market dynamics, which can be influenced by regulations and policies.

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Two key features of the housing market that motivated us

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to write this, this study.

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And the first is that you've seen really high returns on

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housing in many countries, including Norway,

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which is the setting of our study.

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And this has to do both with high house price growth

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and also with high leverage.

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So typically when you buy a house,

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you take up a big mortgage.

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And the result of this is that a lot

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of people have made a lot of money from owning housing.

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At the same time, there are some substantial barriers

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to entry in the housing market.

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So not everyone can sort of access this high return assets.

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So the price level is high

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and housing is indivisible, so you have

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to buy one whole house.

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And in addition, you have big transaction costs

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and you have mortgage regulation like loan to value caps

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and debt to income caps, et cetera.

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So this, these two features create sort of natural room

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for affluent parents to sort of step in

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and support their kids in the housing market.

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And then the idea is

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that if you enter the housing market earlier,

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if you're more likely to become a homeowner, that's going

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to increase your wealth later in life.

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And as a result of this,

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the parents' relative wealth position gets sort

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of transferred to their kids through the housing markets.

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I think our paper sort of speaks

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to three separate literature.

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So the first has to do

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with just intergenerational wealth persistence in general.

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So several papers established that wealthy parents,

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on average, they tend to have wealthier children.

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A lot of these papers have have focused on sort

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of nature versus nurture, et cetera.

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And not that many papers have really focused on housing,

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which is the, which is the key, focus of our paper.

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And then you have another, literature that looks at,

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transfers in particular.

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So financial transfers from parents to kids.

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And this is often reported in survey data.

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So we, we know quite a lot about that,

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that if you receive a transfer from a parent

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or from other family members, you're more likely

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to enter the housing market.

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But these financial transfers, that's just sort

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of one mechanism for how parents can support their kids.

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So we take sort of a, a broader view

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and look at parent wealth in general.

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And then finally there's a third literature, which is

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somewhat smaller, but it looks at

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how do these early in life housing outcomes affect

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wealth later in life.

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So for instance, if you take up a big mortgage

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and you repay that, how's that going

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to affect your wealth when you're in your forties

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or your fifties, et cetera.

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And so what we do is that we lean on the insight from all

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of these three different literatures and we, we combine them

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and we look at how does parent wealth, transfer

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to kids' wealth through the housing markets.

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The Norwegian tax data is, it's a really,

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great data set.

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It covers the population of Norwegian tax fathers

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going back to 1992.

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And because we have a wealth tax in Norway,

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we have pretty good, information on wells holding.

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So we have these balance sheet items for households.

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And of course what is key for our study is that we're able

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to link parents and children in the tax data.

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So we have these intergenerational linkages in the data

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that we rely heavily on.

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There's two key identification challenges in the paper.

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So the first is that we want to know

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how parental wealth affects offspring's housing outcomes.

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So for instance, the likelihood of being a homeowner.

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And of course if you have, richer parents,

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you can be more likely to be a homeowner

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for a number of different reasons.

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Now, we can control for a lot of stuff, like we can control

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for the fact that wealthier parents, they tend to have kids

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that have higher income, have higher education,

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are more likely to live in a city, et cetera.

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And we can also control for a lot

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of observable characteristics of the parents.

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So wealthier parents, they also tend

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to have higher education.

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They're more likely to live in urban areas, et cetera.

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So a lot of this stuff that we can observe, we control

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for and we do what we call a a a mediation analysis.

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So it's just like a statistical decomposition.

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But then of course there's still a concern

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that there might be some unobservable differences

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between kids with richer parents and poorer parents.

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So what we do here is that we, rely on,

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hopefully exogenous variation in parental wealth,

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which is caused by international stock market returns.

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So parents are going to have different exposure

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to the stock market.

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So some own a lot of stocks

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or funds, et cetera, and others do not.

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And the idea is simply

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that in some years the international stock market is going

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to be doing really well,

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and that's going to increase the wealth

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of some parents and not others.

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And so we can use that variation in wealth

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that just results from these international stock market

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returns to look at how that affects, for instance,

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the probability that a kid enters the housing market.

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So that was the first key challenge that was looking at

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how does parent wealth affect children's housing outcomes?

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And then the second identification challenge is figuring out

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how do these early in life housing outcomes

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affect later in life wealth?

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And so here again, we do this statistical decomposition.

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We control for everything we can control for.

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Uh, but we're still left with the fact that people

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that buy a house early might be different than people

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who don't buy a house early.

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And so here again, we, what we want is to try

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to get some exogenous

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Variation in when do you become a homeowner?

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And what we do here is that we look at the timing

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of intrafamily death.

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So in particular, we look at the death of a grandparent,

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and it turns out that in the year when a grandparent dies,

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there's a big increase in the probability

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that the grandkids enters the housing market.

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That could be for instance,

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because the parents inherit some wealth, et cetera.

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And so we just look at this timing difference, like exactly

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how old are you when a grandparent dies?

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And we use the variation that that causes

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and exactly when do you enter the housing market to look at

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how important is housing for your wealth, later in life.

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What we find in the paper is that if you have parents

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that are in the upper half of the wealth distribution,

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so if you have richer parents, you're 15% more likely

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to be a homeowner by the age of 30.

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And that's after we control for everything we can sort

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of observe about the household and the parents.

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And then we find that for every additional year

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that you are in the housing market, that's going

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to increase your, your midlife wealth by around $10,000.

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And so as a result of this, having richer parents

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increases your chances of being rich at midlife

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through the housing market.

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And when we try to quantify how big is this channel compared

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to just overall intergenerational wealth persistence,

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we find that housing accounts for nearly 15%.

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So is that big or is it small?

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Our take is that it's, it's quite sizeable

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and in fact it's the same magnitude as the impact

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that parents have on their kids' income, education,

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location, et cetera.

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So, so the influence

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that parents have on their kids' characteristics is equally

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important as the influence

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that parents have on their kids' housing outcomes.

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The main conclusion of the paper is

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that housing is indeed an important driver

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of intergenerational wealth persistence.

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It accounts for nearly 15% of this persistence.

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And we think that it's important to sort

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of single out housing

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because housing in the housing market is something

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that policy makers to a large degree affect already.

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So they had a, they have a lot of tools

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that influenced this channel.

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So in the paper, we build a theoretical model

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and we look at how this housing channel

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of intergenerational wealth persistence is affected by,

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house price growth and mortgage regulation, et cetera.

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And of course, these are things that policy makers influence

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by changing, mortgage regulation

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or building restrictions or tax schemes, et cetera.

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So we think that the housing channel is something

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that policymakers can influence,

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and it's something that probably deserves more attention in

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the, in the literature.

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