The Role of Housing in Household Decision Making

This thesis studies the role of housing in household decision making from both the theoretical and empirical point of view. Chapter 2 uses the British Household Panel Survey (BHPS) from 1997-2008 and studies the impact of local authority district house prices on labour supply of couples via a bivariate probit model. The two-equation system not only enhances efficiency of estimation but also makes the estimation of marginal effect of house prices on the marginal, joint and conditional probability of the couple's labour supply possible while a univariate model only gives information on marginal probability of individual's labour supply. We find gender and age differences in labour participation when house price changes. Chapter 3 is motivated by the theory that different preferences and circumstances (cash-on-hand) generate alternative portfolio regimes that reflect different degrees of proximity to borrowing constraints. It fits a multivariate Gaussian mixture model via a censored data expectation-maximisation (EM) algorithm on data from Wealth and Asset Survey (WAS) to classify the four solution regimes implied by the theory. Based on these classification results, Chapter 4 estimates the marginal propensity to consume out of wealth (MPC) for heterogeneous older homeowners by minimising the difference between model predicted consumption and imputed consumption from the data for older homeowners. The results suggest a stimulus is most effective for the borrowing constrained, low net-worth households since their consumption is more sensitive to a wealth shock. Chapter 5 analyses a life cycle model with three financial assets (one is mortgage debt) and housing with borrowing constraints and uncertain asset return and labour income. We find conditions on general preferences and constraint parameters for the solutions in a period to involve different sets of binding constraints. We derive closed form solutions and simulate life time paths for different realisations of uncertainty with specialised preferences.