When People Give Up on Homeownership, Their Financial Behaviour Changes
Housing affordability is usually discussed in terms of prices, interest rates and the difficulty of saving a down payment.
But there may be another cost that gets far less attention.
In a recent Globe and Mail column, I looked at research suggesting that when people stop believing homeownership is achievable, they begin changing other parts of their financial lives too.
The study identifies an important psychological divide among renters.
People who still believe they have a realistic shot at buying a home tend to cut spending, work harder and avoid financial risks that could derail their progress.
People who decide homeownership is effectively impossible tend to move in the opposite direction.
Their spending rises relative to their wealth. Their work effort declines. And they become more willing to take financial risks.
One of the more striking findings is what the researchers call a “gambling for redemption” effect.
If steady saving no longer seems capable of getting someone where they want to go, long-shot investments can start to look more appealing. Taking a big risk may feel rational when the conventional path already appears closed.
That helps explain why housing affordability may have much broader consequences than the traditional buy-versus-rent debate suggests.
A mortgage is often described as forced saving. But it can also act as a form of forced financial optimization.
Once someone buys a home, cash flow becomes committed to a long-term goal. Additional earnings have a clear purpose. Large investment losses become more threatening. Time horizons can lengthen.
The concern is not that everyone must own a home to be financially successful.
It is that people need to believe long-term effort still has a reasonable chance of paying off.
An economy has a problem when a growing number of people conclude that the traditional financial milestones are permanently beyond their reach.
Housing affordability is not just about whether people can buy houses.
It may also affect whether they believe there is any point in planning for the future.
Preet Banerjee
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