Housing Tenure Transition and Dissaving by the Elderly

Abstract

A central question in empirical studies dealing with life cycle behaviour is whether elderly households dissave at a rate that is consistent with predictions of life cycle theory as formulated in Yaari (1964). A central question in the analysis of housing markets is whether elderly households wish to liquidate their housing wealth. Life cycle theory predicts that households will wish to consume most, if not all, of their housing wealth (Artle and Varaiya 1978). These predictions of wealth consumption by the elderly have not been corroborated by empirical studies. There exists a strong consensus in the empirical life cycle literature that households typically wish to augment, not consume, their bequeathable wealth. The remaining debate is over whether this behaviour reflects strong bequest objectives (Bernheim 1991) or precautionary motives (Hurd 1987). There exists a consensus in the housing literature (Merrill 1984; Venti and Wise 1989, 1990; Feinstein and McFadden 1989; Skinner 1993) that retired households do not wish to consume housing equity. This literature also concludes that when housing wealth liquidation does occur, it is triggered by noneconomic events rather than by the economic logic of life cycle theory. I address two questions in this paper using U.S. and Canadian micro survey data. First, what is the incidence of household decisions to consume housing wealth? Second, what factors determine the decision of elderly homeowners to liquidate housing wealth by switching to tenancy (or dependency)? In dealing with the second question I am particularly interested in whether households that are consuming bequeathable wealth are more likely to choose to liquidate housing wealth in this manner. Section II summarizes the evidence I find on the first (incidence) question. In section III I review the empirical model I use to address the second