Determinant of Allocation of Housing Inventory: Competition between Households and Investors

Abstract

This paper develops a theoretical model for equilibrium rent-to-price ratios from the competition between households and investors in the housing market. Households make their housing tenure choice in terms of rent vs. buy such as minimizing the cost of occupying a housing unit. On the other hand, investors choose between investing in rental housing vs. other investment opportunities in order to maximize their net present value. In the face of limited housing inventory, households and investors bid against one another which determines the allocation of the housing units among households (owner occupied properties) and investors (rental properties). We derive the sensitivity of the equilibrium rent-toprice ratio with respect to various market parameters, and subsequently analyze their potential impacts on the homeownership rate in the community. We show that some government mortgage programs subsidize homeownership to increase the affordability of owning a house, but may also provide even more incentive to the housing investors. Unless the government can effectively control the eligibility of borrowers, such affordable mortgage programs could work against their objectives and lead to higher housing prices and lower homeownership rates. Our model framework can be used to analyze the potential impacts of some of the new affordable housing policies on house prices or homeownership rates before adopting them.

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