On the Choice to Rent or Own a House

This book focuses on the choice of owning versus
renting. A life-cycle framework is proposed, where a nitely lived risk averse agent can choose between
owning and renting a house, and is exposed to two
sources of uncertainty: house price and labor
income.
The rst chapter analyzes two alternatives for
renting a given house: (i) a long term xed-price rent contract, and (ii) a rent contract
that is fully adjustable to house prices.
Alternatively, the agent can buy the house borrowing
at the risk free rate. The equilibrium long term xed-price rent and the adjustable rent are derived,
such that the agent is indifferent ex ante between
owning and renting. The second and the third chapter
investigate how the choice of owning a house is
affected by taking a mortgage contract that has a
risk of default. Lenders price the mortgage, charging
a default premium to compensate themselves for
expected losses due to default on the mortgage. As a
result, the cost of mortgage has a major impact on
the owning decision. Moreover, the adjustable rent is
derived, such that the agent is indifferent ex ante
between owning and renting.

Autorentext

Is Economist at European Central Bank, ResearchDivision. He earned his BA in Economics from University of Verona(1998), his MSc in Economics from CORIPE (1999), and his PhD inBusiness Administration from University of California at Berkeley(2008). From 2000 to 2004 he worked in the risk management ofCattolica Assicurazioni and Allianz-Ras.

Klappentext

This book focuses on the choice of owning versus renting. A life-cycle framework is proposed, where a nitely lived risk averse agent can choose between owning and renting a house, and is exposed to two sources of uncertainty: house price and labor income. The rst chapter analyzes two alternatives for renting a given house: (i) a long term xed-price rent contract, and (ii) a rent contractthat is fully adjustable to house prices.Alternatively, the agent can buy the house borrowingat the risk free rate. The equilibrium long term xed-price rent and the adjustable rent are derived,such that the agent is indifferent ex ante betweenowning and renting. The second and the third chapterinvestigate how the choice of owning a house isaffected by taking a mortgage contract that has arisk of default. Lenders price the mortgage, charginga default premium to compensate themselves forexpected losses due to default on the mortgage. As aresult, the cost of mortgage has a major impact onthe owning decision. Moreover, the adjustable rent isderived, such that the agent is indifferent ex antebetween owning and renting.