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Shattered Housing

Journal: Journal of Financial Economics

Date: 20240601

Author: Happel, Jonas; Karabulut, Yigitcan; Schafer, Larissa; Tuzel, Selale

Abstract:
Do negative housing shocks lead to persistent changes in household attitudes toward housing and homeownership? We use the residential destruction of Germany during World War II (WWII) as a quasi-experiment and exploit the reasonably exogenous region-by-cohort variation in destruction exposure. We find that WWII-experiencing cohorts from high destruction regions are significantly less likely to be homeowners decades later, controlling for regional differences and household characteristics. Underlying this effect are changes in household attitudes toward homeownership that also extend to preferences for housing consumption, with little or no support for risk preferences, income and wealth effects, or supply-side factors.

Link: Google Scholar

Key Findings

Exposure to WWII Housing Destruction Reduces Homeownership

One standard deviation increase in destruction rate leads to 2.7 percentage point decrease in homeownership probability among war-exposed cohorts decades later

Impact on Housing Attitudes

War-exposed cohorts from heavily destroyed regions express significantly weaker preferences for homeownership and consume smaller dwellings

Effect on Aggregate Homeownership

War destruction reduced homeownership rates by 3.8 percentage points in 1985, with effects declining to 1.1 percentage points by 2017 as exposed cohorts age

Regional Variation in Housing Destruction

  • Average destruction rate was 35.2% across regions
  • Destruction varied substantially from 0% to 63.4%
  • Median destruction rate was 37.6%

Impact on Homeownership Attitudes

  • 53% of overall sample expressed positive attitudes toward homeownership
  • War-exposed cohorts show significantly lower preference for homeownership
  • Effect persists decades after the war

Aggregate Homeownership Trends 1985-2017

  • Homeownership rates increased from 46% to 56% between 1985-2017
  • War destruction effect decreases over time as exposed cohorts age
  • Gap between actual and counterfactual rates narrows from 3.8 to 1.1 percentage points

Contribution and Implications

  • First causal evidence linking negative housing experiences to persistent changes in homeownership attitudes
  • Explains historically low homeownership rates in Germany
  • Demonstrates long-lasting impact of historical events on household economic decisions
  • Shows that experience effects are domain-specific, affecting housing but not other property ownership

Data Sources

  • Regional destruction data from Table 1, Panel B showing destruction statistics
  • Homeownership attitudes based on Table 4 showing household preferences
  • Aggregate trends constructed from Figure 2 showing homeownership rates over time
  • All analysis based on German Socio-Economic Panel (SOEP) data 1985-2017