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The housing channel of intergenerational wealth persistence

View more insights in Social Sciences - Economics - Microeconomics

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View the page of Ella Getz Wold

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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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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.265 --> 00:03.445
Two key features of the housing market that motivated us

00:03.465 --> 00:04.845
to write this, this study.

00:05.025 --> 00:09.085
And the first is that you've seen really high returns on

00:09.085 --> 00:11.325
housing in many countries, including Norway,

00:11.325 --> 00:12.765
which is the setting of our study.

00:13.665 --> 00:16.365
And this has to do both with high house price growth

00:16.705 --> 00:18.165
and also with high leverage.

00:18.305 --> 00:20.045
So typically when you buy a house,

00:20.145 --> 00:21.405
you take up a big mortgage.

00:22.385 --> 00:24.085
And the result of this is that a lot

00:24.085 --> 00:26.365
of people have made a lot of money from owning housing.

00:28.175 --> 00:31.395
At the same time, there are some substantial barriers

00:31.535 --> 00:32.995
to entry in the housing market.

00:33.175 --> 00:37.155
So not everyone can sort of access this high return assets.

00:38.095 --> 00:39.675
So the price level is high

00:39.975 --> 00:42.435
and housing is indivisible, so you have

00:42.435 --> 00:43.795
to buy one whole house.

00:44.895 --> 00:47.595
And in addition, you have big transaction costs

00:47.735 --> 00:50.795
and you have mortgage regulation like loan to value caps

00:50.795 --> 00:52.395
and debt to income caps, et cetera.

00:53.335 --> 00:57.155
So this, these two features create sort of natural room

00:57.375 --> 00:59.955
for affluent parents to sort of step in

00:59.955 --> 01:02.435
and support their kids in the housing market.

01:03.815 --> 01:04.995
And then the idea is

01:04.995 --> 01:08.035
that if you enter the housing market earlier,

01:08.335 --> 01:11.315
if you're more likely to become a homeowner, that's going

01:11.315 --> 01:13.155
to increase your wealth later in life.

01:13.295 --> 01:14.315
And as a result of this,

01:15.495 --> 01:18.315
the parents' relative wealth position gets sort

01:18.315 --> 01:21.155
of transferred to their kids through the housing markets.

01:21.955 --> 01:23.315
I think our paper sort of speaks

01:23.415 --> 01:25.795
to three separate literature.

01:26.675 --> 01:28.015
So the first has to do

01:28.015 --> 01:31.135
with just intergenerational wealth persistence in general.

01:31.795 --> 01:36.775
So several papers established that wealthy parents,

01:36.955 --> 01:39.375
on average, they tend to have wealthier children.

01:40.255 --> 01:42.775
A lot of these papers have have focused on sort

01:42.775 --> 01:45.095
of nature versus nurture, et cetera.

01:45.885 --> 01:48.265
And not that many papers have really focused on housing,

01:48.275 --> 01:51.505
which is the, which is the key, focus of our paper.

01:53.015 --> 01:56.755
And then you have another, literature that looks at,

01:57.555 --> 01:58.635
transfers in particular.

01:58.695 --> 02:01.075
So financial transfers from parents to kids.

02:01.815 --> 02:03.835
And this is often reported in survey data.

02:03.975 --> 02:05.795
So we, we know quite a lot about that,

02:05.865 --> 02:08.235
that if you receive a transfer from a parent

02:08.415 --> 02:11.155
or from other family members, you're more likely

02:11.155 --> 02:12.395
to enter the housing market.

02:13.375 --> 02:15.715
But these financial transfers, that's just sort

02:15.715 --> 02:18.435
of one mechanism for how parents can support their kids.

02:18.815 --> 02:21.075
So we take sort of a, a broader view

02:21.095 --> 02:23.275
and look at parent wealth in general.

02:24.865 --> 02:27.285
And then finally there's a third literature, which is

02:28.245 --> 02:29.565
somewhat smaller, but it looks at

02:30.465 --> 02:33.565
how do these early in life housing outcomes affect

02:33.625 --> 02:34.885
wealth later in life.

02:35.225 --> 02:38.005
So for instance, if you take up a big mortgage

02:38.025 --> 02:39.725
and you repay that, how's that going

02:39.725 --> 02:41.805
to affect your wealth when you're in your forties

02:42.025 --> 02:43.365
or your fifties, et cetera.

02:44.425 --> 02:47.485
And so what we do is that we lean on the insight from all

02:47.545 --> 02:51.565
of these three different literatures and we, we combine them

02:52.265 --> 02:56.085
and we look at how does parent wealth, transfer

02:56.085 --> 02:58.365
to kids' wealth through the housing markets.

02:58.825 --> 03:01.885
The Norwegian tax data is, it's a really,

03:02.265 --> 03:03.285
great data set.

03:03.285 --> 03:06.125
It covers the population of Norwegian tax fathers

03:06.815 --> 03:08.405
going back to 1992.

03:09.225 --> 03:12.205
And because we have a wealth tax in Norway,

03:12.265 --> 03:15.045
we have pretty good, information on wells holding.

03:15.145 --> 03:18.365
So we have these balance sheet items for households.

03:19.505 --> 03:22.925
And of course what is key for our study is that we're able

03:22.945 --> 03:25.485
to link parents and children in the tax data.

03:25.625 --> 03:28.965
So we have these intergenerational linkages in the data

03:28.965 --> 03:30.445
that we rely heavily on.

03:30.795 --> 03:34.405
There's two key identification challenges in the paper.

03:35.345 --> 03:37.445
So the first is that we want to know

03:37.585 --> 03:41.765
how parental wealth affects offspring's housing outcomes.

03:41.945 --> 03:43.885
So for instance, the likelihood of being a homeowner.

03:44.905 --> 03:48.045
And of course if you have, richer parents,

03:48.745 --> 03:50.285
you can be more likely to be a homeowner

03:50.345 --> 03:51.605
for a number of different reasons.

03:53.245 --> 03:56.345
Now, we can control for a lot of stuff, like we can control

03:56.345 --> 03:59.185
for the fact that wealthier parents, they tend to have kids

03:59.185 --> 04:01.905
that have higher income, have higher education,

04:02.085 --> 04:04.425
are more likely to live in a city, et cetera.

04:05.365 --> 04:06.905
And we can also control for a lot

04:06.905 --> 04:08.825
of observable characteristics of the parents.

04:09.085 --> 04:10.785
So wealthier parents, they also tend

04:10.785 --> 04:11.985
to have higher education.

04:12.615 --> 04:15.305
They're more likely to live in urban areas, et cetera.

04:16.005 --> 04:19.425
So a lot of this stuff that we can observe, we control

04:19.445 --> 04:22.785
for and we do what we call a a a mediation analysis.

04:22.785 --> 04:24.825
So it's just like a statistical decomposition.

04:26.475 --> 04:28.175
But then of course there's still a concern

04:28.175 --> 04:30.815
that there might be some unobservable differences

04:31.085 --> 04:33.895
between kids with richer parents and poorer parents.

04:34.995 --> 04:39.455
So what we do here is that we, rely on,

04:39.455 --> 04:42.455
hopefully exogenous variation in parental wealth,

04:43.105 --> 04:46.175
which is caused by international stock market returns.

04:47.075 --> 04:49.775
So parents are going to have different exposure

04:49.875 --> 04:50.895
to the stock market.

04:51.315 --> 04:52.975
So some own a lot of stocks

04:52.995 --> 04:55.575
or funds, et cetera, and others do not.

04:56.755 --> 04:57.895
And the idea is simply

04:57.925 --> 05:00.615
that in some years the international stock market is going

05:00.615 --> 05:01.655
to be doing really well,

05:02.235 --> 05:03.775
and that's going to increase the wealth

05:03.795 --> 05:05.535
of some parents and not others.

05:06.275 --> 05:08.695
And so we can use that variation in wealth

05:08.725 --> 05:12.055
that just results from these international stock market

05:12.055 --> 05:15.015
returns to look at how that affects, for instance,

05:15.035 --> 05:18.135
the probability that a kid enters the housing market.

05:19.595 --> 05:22.015
So that was the first key challenge that was looking at

05:22.015 --> 05:24.935
how does parent wealth affect children's housing outcomes?

05:26.035 --> 05:30.135
And then the second identification challenge is figuring out

05:30.435 --> 05:33.615
how do these early in life housing outcomes

05:34.315 --> 05:36.415
affect later in life wealth?

05:37.995 --> 05:40.895
And so here again, we do this statistical decomposition.

05:41.235 --> 05:43.295
We control for everything we can control for.

05:43.995 --> 05:47.005
Uh, but we're still left with the fact that people

05:47.005 --> 05:50.205
that buy a house early might be different than people

05:50.465 --> 05:51.645
who don't buy a house early.

05:52.865 --> 05:55.285
And so here again, we, what we want is to try

05:55.285 --> 05:56.645
to get some exogenous

05:56.645 --> 05:59.525
Variation in when do you become a homeowner?

06:00.705 --> 06:03.925
And what we do here is that we look at the timing

06:04.065 --> 06:05.485
of intrafamily death.

06:06.545 --> 06:10.525
So in particular, we look at the death of a grandparent,

06:11.425 --> 06:15.285
and it turns out that in the year when a grandparent dies,

06:16.075 --> 06:18.205
there's a big increase in the probability

06:18.795 --> 06:21.085
that the grandkids enters the housing market.

06:22.115 --> 06:23.165
That could be for instance,

06:23.165 --> 06:25.845
because the parents inherit some wealth, et cetera.

06:26.775 --> 06:29.915
And so we just look at this timing difference, like exactly

06:30.015 --> 06:32.155
how old are you when a grandparent dies?

06:32.815 --> 06:35.435
And we use the variation that that causes

06:36.015 --> 06:39.515
and exactly when do you enter the housing market to look at

06:39.515 --> 06:42.915
how important is housing for your wealth, later in life.

06:43.345 --> 06:46.915
What we find in the paper is that if you have parents

06:46.985 --> 06:49.075
that are in the upper half of the wealth distribution,

06:49.075 --> 06:52.835
so if you have richer parents, you're 15% more likely

06:53.055 --> 06:55.235
to be a homeowner by the age of 30.

06:56.085 --> 06:59.265
And that's after we control for everything we can sort

06:59.265 --> 07:01.385
of observe about the household and the parents.

07:03.315 --> 07:05.935
And then we find that for every additional year

07:06.045 --> 07:08.775
that you are in the housing market, that's going

07:08.775 --> 07:13.095
to increase your, your midlife wealth by around $10,000.

07:14.575 --> 07:17.515
And so as a result of this, having richer parents

07:18.035 --> 07:20.995
increases your chances of being rich at midlife

07:21.765 --> 07:23.135
through the housing market.

07:24.035 --> 07:27.335
And when we try to quantify how big is this channel compared

07:27.335 --> 07:30.735
to just overall intergenerational wealth persistence,

07:31.555 --> 07:34.815
we find that housing accounts for nearly 15%.

07:35.855 --> 07:37.515
So is that big or is it small?

07:38.135 --> 07:40.275
Our take is that it's, it's quite sizeable

07:40.335 --> 07:44.565
and in fact it's the same magnitude as the impact

07:44.595 --> 07:47.805
that parents have on their kids' income, education,

07:49.085 --> 07:50.925
location, et cetera.

07:51.585 --> 07:53.005
So, so the influence

07:53.005 --> 07:56.005
that parents have on their kids' characteristics is equally

07:56.005 --> 07:57.965
important as the influence

07:57.965 --> 08:00.685
that parents have on their kids' housing outcomes.

08:01.665 --> 08:03.645
The main conclusion of the paper is

08:03.645 --> 08:06.205
that housing is indeed an important driver

08:06.385 --> 08:08.365
of intergenerational wealth persistence.

08:08.785 --> 08:12.125
It accounts for nearly 15% of this persistence.

08:13.025 --> 08:14.965
And we think that it's important to sort

08:14.965 --> 08:16.045
of single out housing

08:16.195 --> 08:19.125
because housing in the housing market is something

08:19.125 --> 08:22.605
that policy makers to a large degree affect already.

08:22.665 --> 08:24.245
So they had a, they have a lot of tools

08:24.315 --> 08:25.925
that influenced this channel.

08:26.945 --> 08:29.565
So in the paper, we build a theoretical model

08:30.305 --> 08:32.645
and we look at how this housing channel

08:32.705 --> 08:36.565
of intergenerational wealth persistence is affected by,

08:36.615 --> 08:39.845
house price growth and mortgage regulation, et cetera.

08:40.505 --> 08:42.965
And of course, these are things that policy makers influence

08:42.965 --> 08:45.405
by changing, mortgage regulation

08:45.585 --> 08:48.925
or building restrictions or tax schemes, et cetera.

08:49.385 --> 08:51.165
So we think that the housing channel is something

08:51.165 --> 08:52.685
that policymakers can influence,

08:53.305 --> 08:56.045
and it's something that probably deserves more attention in

08:56.045 --> 08:57.125
the, in the literature.

00:00 - Two key features of the housing market that motivated us to write this, this study. And the first is that you've seen really high returns on housing in many countries, including Norway, which is the setting of our study. And this has to do both with high house price growth

00:16 - and also with high leverage. So typically when you buy a house, you take up a big mortgage. And the result of this is that a lot of people have made a lot of money from owning housing. At the same time, there are some substantial barriers to entry in the housing market. So not everyone can sort of access this high return assets. So the price level is high and housing is indivisible, so you have

00:42 - to buy one whole house. And in addition, you have big transaction costs and you have mortgage regulation like loan to value caps and debt to income caps, et cetera. So this, these two features create sort of natural room for affluent parents to sort of step in and support their kids in the housing market. And then the idea is that if you enter the housing market earlier, if you're more likely to become a homeowner, that's going

01:11 - to increase your wealth later in life. And as a result of this, the parents' relative wealth position gets sort of transferred to their kids through the housing markets. I think our paper sort of speaks to three separate literature. So the first has to do with just intergenerational wealth persistence in general. So several papers established that wealthy parents, on average, they tend to have wealthier children.

01:40 - A lot of these papers have have focused on sort of nature versus nurture, et cetera. And not that many papers have really focused on housing, which is the, which is the key, focus of our paper. And then you have another, literature that looks at, transfers in particular. So financial transfers from parents to kids. And this is often reported in survey data. So we, we know quite a lot about that, that if you receive a transfer from a parent

02:08 - or from other family members, you're more likely to enter the housing market. But these financial transfers, that's just sort of one mechanism for how parents can support their kids. So we take sort of a, a broader view and look at parent wealth in general. And then finally there's a third literature, which is somewhat smaller, but it looks at how do these early in life housing outcomes affect wealth later in life.

02:35 - So for instance, if you take up a big mortgage and you repay that, how's that going to affect your wealth when you're in your forties or your fifties, et cetera. And so what we do is that we lean on the insight from all of these three different literatures and we, we combine them and we look at how does parent wealth, transfer to kids' wealth through the housing markets. The Norwegian tax data is, it's a really, great data set.

03:03 - It covers the population of Norwegian tax fathers going back to 1992. And because we have a wealth tax in Norway, we have pretty good, information on wells holding. So we have these balance sheet items for households. And of course what is key for our study is that we're able to link parents and children in the tax data. So we have these intergenerational linkages in the data that we rely heavily on. There's two key identification challenges in the paper.

03:35 - So the first is that we want to know how parental wealth affects offspring's housing outcomes. So for instance, the likelihood of being a homeowner. And of course if you have, richer parents, you can be more likely to be a homeowner for a number of different reasons. Now, we can control for a lot of stuff, like we can control for the fact that wealthier parents, they tend to have kids that have higher income, have higher education, are more likely to live in a city, et cetera.

04:05 - And we can also control for a lot of observable characteristics of the parents. So wealthier parents, they also tend to have higher education. They're more likely to live in urban areas, et cetera. So a lot of this stuff that we can observe, we control for and we do what we call a a a mediation analysis. So it's just like a statistical decomposition. But then of course there's still a concern that there might be some unobservable differences

04:31 - between kids with richer parents and poorer parents. So what we do here is that we, rely on, hopefully exogenous variation in parental wealth, which is caused by international stock market returns. So parents are going to have different exposure to the stock market. So some own a lot of stocks or funds, et cetera, and others do not. And the idea is simply that in some years the international stock market is going

05:00 - to be doing really well, and that's going to increase the wealth of some parents and not others. And so we can use that variation in wealth that just results from these international stock market returns to look at how that affects, for instance, the probability that a kid enters the housing market. So that was the first key challenge that was looking at how does parent wealth affect children's housing outcomes? And then the second identification challenge is figuring out

05:30 - how do these early in life housing outcomes affect later in life wealth? And so here again, we do this statistical decomposition. We control for everything we can control for. but we're still left with the fact that people that buy a house early might be different than people who don't buy a house early. And so here again, we, what we want is to try to get some exogenous Variation in when do you become a homeowner?

06:00 - And what we do here is that we look at the timing of intrafamily death. So in particular, we look at the death of a grandparent, and it turns out that in the year when a grandparent dies, there's a big increase in the probability that the grandkids enters the housing market. That could be for instance, because the parents inherit some wealth, et cetera. And so we just look at this timing difference, like exactly how old are you when a grandparent dies?

06:32 - And we use the variation that that causes and exactly when do you enter the housing market to look at how important is housing for your wealth, later in life. What we find in the paper is that if you have parents that are in the upper half of the wealth distribution, so if you have richer parents, you're 15% more likely to be a homeowner by the age of 30. And that's after we control for everything we can sort of observe about the household and the parents. And then we find that for every additional year

07:06 - that you are in the housing market, that's going to increase your, your midlife wealth by around $10,000. And so as a result of this, having richer parents increases your chances of being rich at midlife through the housing market. And when we try to quantify how big is this channel compared to just overall intergenerational wealth persistence, we find that housing accounts for nearly 15%. So is that big or is it small? Our take is that it's, it's quite sizeable

07:40 - and in fact it's the same magnitude as the impact that parents have on their kids' income, education, location, et cetera. So, so the influence that parents have on their kids' characteristics is equally important as the influence that parents have on their kids' housing outcomes. The main conclusion of the paper is that housing is indeed an important driver of intergenerational wealth persistence.

08:08 - It accounts for nearly 15% of this persistence. And we think that it's important to sort of single out housing because housing in the housing market is something that policy makers to a large degree affect already. So they had a, they have a lot of tools that influenced this channel. So in the paper, we build a theoretical model and we look at how this housing channel of intergenerational wealth persistence is affected by,

08:36 - house price growth and mortgage regulation, et cetera. And of course, these are things that policy makers influence by changing, mortgage regulation or building restrictions or tax schemes, et cetera. So we think that the housing channel is something that policymakers can influence, and it's something that probably deserves more attention in the, in the literature.

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