Wednesday, May 31, 2017

Home ownership and trade

There appears to be a negative correlation between the home ownership rate and the current account balance for advanced economies. Below is a chart showing the data.



Here is the same data plotted in a way that makes the correlation more obvious.



I have a couple of theories about why these two variables are linked.  Countries with high home ownership rates may have policies that make it easy to get mortgages and other forms of consumer credit. This leads to strong demand for savings which tend to drive capital inflows and associated trade deficits.

Another theory is that home ownership reduces the need for cash savings in bank accounts. People who own houses never have to pay rents and they don't have to worry about inflation in housing costs.  Less bank saving is offset by capital inflows and associated trade deficits.

3 comments:

  1. This is interesting. Several other possible explanations include: 1) high homeownership rates require governments to spend a great deal more on infrastructure - roads, sewer lines, etc; 2) in the US homeownership was a catalyst for additional spending through refinancing and higher consumer spending drives up deficits; and finally, 3) Homeownership is usually connected to a massive subsidy through the mortgage interest deduction which further leads to greater spending and deficits. Just some thoughts.

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  2. Hi Mark!
    I agree that home building drives a lot of spending on infrastructure and also on appliances and furniture. And homeowners get a tax break which helps to support their spending.

    Most importantly it provides good investment opportunities which stop savings from being exported overseas.

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