A Permanent Change in the Route to Owner Occupation?

DOIhttp://doi.org/10.1111/j.0036-9292.2004.05101002.x
AuthorMark Andrew
Date01 February 2004
Publication Date01 February 2004
A PERMANENT CHANGE IN THE ROUTE
TO OWNER OCCUPATION?
Mark Andrew
n
Abstract
This paper attempts to explain why home ownership rates among young adults fell
in the early 1990s when various indicators suggested it had become more affordable.
As a potential explanation, we focuson the relatively slower growth in their incomes
and argue that this could signal a fundamental change in behaviour, a change in
route adopted into owner occupation, induced by structural economic change. In
examining the implications for housing tenure, we use a conditional fixed effects
multinomial logit model to exploit the information on the tenure choice and the
timing of transitions in the British Household Panel Survey. Our results reveal that
relatively slower income growth contributed significantly to this decline and that
ignoring the intertemporalcorrelation in micro-panels generates inconsistent results.
I Intro duction
The first-time buyer (FTB) housing market in Britain experienced a contraction
in the 1990s even though home ownership had become more affordable. This
paper investigates one possible cause: the deterioration of the young adults’
position in the income distribution caused by the relatively slower growth in
their earnings. While home ownership for many of them remains the long-term
preference, it has become less attractive and viable as a housing tenure at the
early stages of their life-cycle.
Section II describes the change in household formation rates and the housing
tenure distribution in the 1990s. Possible explanations are presented in Section III.
Although household formation and housing tenure choices have been widely
considered in the housing literature, very few studies in the UK utilise panel data or
panel estimators. Section IV looks at the model specification. We list the potential
problems that arise when cross-section data are used and when the intertemporal
correlation in panel data is ignored, and then proceed to outline how a housing
tenure choice model within a random utility framework avoiding these problems can
be empirically implemented. Section V reports the empirical results and illustrates
that they can explain a significant proportion of the fall in home ownership rates
among the 20–34 age groups in the 1990s. Conclusions are drawn in Section VI.
n
University of Reading
Scottish Journal of Political Economy, Vol. 51, No. 1, February 2004
rScottish Economic Society 2004, Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
24
II Changes in Household Formation and HousingTenure
The pre-1990 trend of forming households and home purchases at an ever earlier
age has been reversed. Table 1 shows the trends toward owner occupation (OO),
the social rented sector (SRS) and the private rented sector (PRS) by age. The
lowest age band is chosen to be 20–24 years as most young adults would have
completed their full-time education by then. Compared to the 1980s, owner
occupation rates among the 20–24 and 25–29 age groups are clearly much lower
and have continued to fall throughout the 1990s. Home ownership rates among
the 30–34 and 35–44 age groups also fell in the early part of the decade but have
since recovered with economic improvement. By contrast, older age groups
either maintained or continued their upward trend in owner occupation. What
puzzles many commentators is that the decline in home ownership occurred
when reductions in mortgage interest rates combined with the fall in the house
price to average earnings ratio improved affordability.
1
As Table 1 reveals,
lower home ownership rates coincided with the emergence of a relatively
youthful PRS, brought about by a decrease in retired households
2
and an
increase in the under 35s (see Green et al., 1999).
Table 1 reflects trends in the behaviour of people who have established
independent households. Figures 1a and 1b highlight another significant
Table 1
Trends in housing tenure in England (percentages)
20–24 25–29 30–34
Year OO SRS PRS OO SRS PRS OO SRS PRS
1984 35 33 33 60 24 16 66 24 10
1988 41 28 30 64 23 13 72 21 7
1991 38 27 35 63 21 16 72 20 8
1993/94 34 31 35 59 21 19 67 22 11
1996/97 28 28 44 54 23 23 65 21 14
1998/99 25 32 43 52 23 24 67 20 13
35–44 45–64 651
Year OO SRS PRS OO SRS PRS OO SRS PRS
1984 69 22 8 61 30 8 49 39 12
1988 77 17 6 71 23 5 54 37 9
1991 77 16 7 76 19 5 59 35 6
1993/94 74 19 7 77 17 6 61 33 6
1996/97 74 17 9 77 17 6 65 29 6
1998/99 75 17 8 78 16 6 67 28 5
Source: Survey of English Housing (SEH) and Labour Force Survey (LFS) Housing Trailers.
1
Between 1991 and 1997, average mortgage interest rates fell from 14.24% to 6.66% and the
house price to earnings ratio from 7.5 to 3.5.
2
This refers mainly to retired households who had opted to rent privately at a time when it
was a main housing tenure, and the decline in their numbers is caused by death or their
institutionalisation.
A PERMANENT CHANGE IN THE ROUTE TO OWNER OCCUPATION? 25
rScottish Economic Society 2004

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