A housing career perspective on risk

The main question analyzed in the article is how uncertainty in the asset price of owner-occupied housing capital affects user costs and consequently housing demand. The analysis is performed within the framework of a dynamic model of planned housing careers. Owner-occupied housing has a dual role as both an asset and a consumption good-a consumption good both now and in the future. By holding owner-occupied housing capital. the risk associated with future purchase of housing can be reduced. Taking account of this, it is shown that the risk premium in the user cost is negative for consumers on a sufficient increasing path of future housing consumption, Hence. the demand for owner-occupied housing of a risk-averse consumer can be increasing in asset price volatility. This result is contrary to the "conventional wisdom" in housing economics and can be identified only within an analytical framework that takes account of the dynamic aspects of housing market behavior. (C) 2001 Elsevier Science.