Consumption and Investment Values in Housing Price: A Real Options Approach

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.

Stimulation of construction industry output through enhanced efficiency of Indian residential real estate sector

“…Works by Henderson (1987), Arrondela and Lefebvreb (2001) and Cassidy et al (2008) have analysed the choice of tenure by separating the demand for housing into service/consumption demand and investment demand. The dual role of housing results in its heterogeneity and thus raises the volatility of price and possibility of overheating in housing market (Hung and Tzang, 2021). In addition to this, it was found that when individuals have more capital in hand, there exists speculative intent in real estate purchase decisions, which consequently results in structural changes in real estate prices.…”

Does High-End Housing Always Have a Premium Luxury Value? A Theoretical and Numerical Study

“…In this study, we extend the model of Hung and Tzang (2021) to derive the value of high-end housing premiums and obtain an analytical solution to the luxury value. To the best of our knowledge, our model is the first to theoretically evaluate high-end housing premiums.…”

“…Here w H is the same as w denoted inHung and Tzang (2021).9 The rental utility can be estimated according toCampbell and Cocco (2015)'s model. As it is not the main concern of this study, we assume that w j is an exogenously set variable.…”