Abstract
Homeowners can be viewed as the put option holders who can sell housing to lenders when the housing price is lower than its mortgage value and sell houses when the housing price rises above a certain threshold. On the basis of the theory of investment under uncertainty, we model the housing value from the perspective of houseowners who can choose to either live in their houses or switch houses for comfort improvement and price appreciation. We can decompose the housing value into consumption and investment values by exploring parameters affecting housing value and decision making of houseowners. We find that the proportion of investment value to housing value increases with the volatility of the housing market, indicating the possible formation of housing bubbles. In addition, the comfort and utility provided by housing are critical for homeowners to decide whether to sell their houses. The analysis provides policymakers and market participants in the real estate market with insights into the price formation of real estate.
Highlights
Housing can be treated as a consumer good that generates a stream of services to satisfy household demands and as an investment asset that may appreciate in price in the real estate market
By adopting real options models for evaluation by including an income approach and assume that the variables are randomly determined, we find that the proportion of investment value to housing value increases with the volatility of the housing market, indicating the possible formation of housing bubbles
By the results of numerical simulation, we find that for houseowners with higher-quality houses, the consumption value of the housing may not become extremely important compared with investment value when they decide to switch houses in a highly volatile housing market
Summary
Housing can be treated as a consumer good that generates a stream of services to satisfy household demands and as an investment asset that may appreciate in price in the real estate market. By adopting real options models for evaluation by including an income approach and assume that the variables are randomly determined, we find that the proportion of investment value to housing value increases with the volatility of the housing market, indicating the possible formation of housing bubbles. By the results of numerical simulation, we find that for houseowners with higher-quality houses (i.e., not necessarily luxurious houses but ones that can deliver higher utility rental benefit), the consumption value of the housing may not become extremely important compared with investment value when they decide to switch houses in a highly volatile housing market. Houses with a lower utility rental benefit rate will be more likely to be sold in exchange for higher-quality houses, especially in a highly volatile real estate market. For a given utility rental benefit, we find that houseowners will care more about consumption value delivered by the housing when the interest rate is low, but they do less when the interest rate becomes higher, especially for highly leveraged mortgage loans
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