Research Discussion Paper – RDP 2005-10 Housing and the Household Wealth Portfolio: The Role of Location
December 2005
Abstract
There is little doubt that cities can provide many benefits, such as greater employment and business opportunities, which tend to result in higher income and wealth for urban households. In addition, there may be a number of non-pecuniary benefits, including greater access to education, infrastructure and services. But these benefits are accompanied by an urban premium on house prices, thus possibly affecting the composition of the asset portfolios of households living in different locations.
Using a recent cross-section of wealth data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey we test whether urbanisation, when controlling for other factors, has a significant effect on the share of assets that households hold in housing. For owner-occupiers, the effect is found to be significant and positive, suggesting that housing is more expensive in larger cities even once we allow for the higher incomes and asset holdings of these households. In fact, the effect is quite large with a 100 person per square kilometre increase in urbanisation increasing the share of assets held in the home by 0.4 percentage points, on average. Further, we find that this effect is not linear but declines at higher levels of urbanisation. Hence, for example, for an average owner-occupier household moving from Cairns to Brisbane city – an increase in urbanisation of around 2,000 persons per square kilometre – the increase in their housing share of total assets is estimated to be 5.6 percentage points.