High inflation has the inevitable consequence of making debt more expensive to take on. While one might assume this would make homes less affordable, research from the University of California San Diego’s Rady School of Management suggests that high inflation coincides with a rise in home ownership.
The study draws on multiple data sources to demonstrate that households that have experienced significant inflation tend to invest in real estate. It proposes that many homeowners purchase property as a means of safeguarding against potential future price surges. This is the first research to identify a causal link between personal exposure to inflation and increased rates of home ownership.
Changing behavior
“We think one reason people choose to buy instead of rent is because they are worried about future inflation, which may drive up both rent and house prices,” the researchers explain. “People who have lived through high inflation in the past may expect higher inflation in the future, causing them to wish they were a homeowner. This is especially true if they can finance with a fixed-rate mortgage, further protecting them from future inflation.”
The researchers surveyed 700 homeowners, across Austria, Germany, Ireland, Italy, Portugal, and Spain, and asked about their reasons for buying a home, personal experiences of high inflation, concerns about future inflation, and whether inflation affected their decision to buy a home.
The survey revealed that half of the respondents believed that “real estate is a good investment if there is inflation.” Furthermore, those who had lived through high inflation were 21% more likely to be worried about future inflation and 74% more likely to say that inflation affected their decision to buy a home.
Scarred from the past
To support their findings, the researchers analyzed data from the European Central Bank’s Household Finance and Consumption Survey, which covers 220,000 households across 22 European countries. The data showed that past experiences of inflation had a significant impact on homeownership rates. For instance, increasing a household’s past inflation experiences from 2% to 5.4% increased their likelihood of owning a home from 65% to 75%.
The study also revealed differences in homeownership rates within and across countries, which can be explained by households’ exposure to past episodes of inflation. For instance, in Germany and Austria, less than half of households own a home, while in Lithuania, Slovakia, and Croatia – countries that have experienced high inflation – 85% or more of households own their homes. In France, where price stability has been the norm, only 57% of households own their homes, compared to 82% in neighboring Spain, which has a history of inflation.
“These households with similar demographics and in similar financial situations make systematically different tenure decisions,” the researchers explain. “While financial institutions play an important role, as do house prices, housing supply and demographics, we show that economic histories experienced by potential homeowners and especially inflation experiences, strongly predict investment in housing.”
Personal experience
Personal experiences can have a significant and long-lasting impact on homeownership decisions, even for immigrants who move to a new housing market. A recent study, utilizing data from the American Community Survey, found that household heads who immigrated to the U.S. were influenced by their lifetime inflation experiences in their home country and in the U.S.
By calculating the household’s lifetime inflation experiences, the researchers identified that those who experienced higher inflation over their lifetime were more likely to be homeowners. This suggests that even when individuals move to a new country, their past experiences continue to shape their decision-making when it comes to homeownership.
This finding underscores the importance of considering individuals’ past experiences when analyzing homeownership trends and making policy decisions. It also highlights the potential barriers that may prevent some individuals from becoming homeowners, such as lack of exposure to inflation or economic instability in their home country.
“We show that the relationship between prior inflation and home purchasing choices is not explained by housing market conditions, nor by indicators of current economic conditions or other economic experiences,” the authors conclude. “The impacts of experiencing high inflation have a long-lasting effect on home ownership.”
