House Hedging Model — which income group is more affected by risk?

This paper investigates the housing market dynamics based on the individual choices of tenants and homeowners. We integrate Han (2008)’s individual homeowners’ transaction choice model with tenants’ housing tenure choice into a single, new model, and take tenants’ and homeowners’ decision into account jointly. As a result, our new model can capture the interaction between the transaction and rental markets and hence is more realistic. The model is applicable to Hong Kong and other countries of which the rental market is a significant proportion of the whole property market. We solve the new model in an analytical way. In addition, we conduct an agent-based simulation on the model. Compared with Han (2008)’s hump-shaped life-cycle paths, our results show that the life-cycle paths are irregular. Nevertheless, the middle-income households are least affected by housing price risk. Moreover, the average Time on Market (TOM) is significantly positively affected by housing vacancy rate under the exogenous price assumption. Finally, the trend of homeownership rate in a relatively closed market is not significantly affected by the specific housing price or rent process. Policy makers can make use of our model to implement more appropriate housing policies to regulate the housing market.