Cultural Norms and Tenure Choice? Investigating the High Homeownership Rate in Taiwan

1. Cultural Norms and Tenure Choice? Investigating the High Homeownership Rate in Taiwan Huei-chung Lu Department of Economics, Fu-Jen Catholic University Mingshen Chen Department of Finance, National Taiwan University

2. Figure 1. Trends for Homeownership Rates in Taiwan: 1976-2002

3. Table A1. Homeownership Rates in Some Countries

4. I. Introduction • Homeownership: Tenure Choice Model • Henderson and Ioannides (1983) Fu (1991); Ioannides and Rosenthal (1994) • Single Housing Demand: State-Dependent Utility Approach • Dual Housing Demands: Consumption and Investment • key factors: wealth, income, property prices, government policy, and conditions of mortgage

5. Heterogeneity of Homeownership Rates among Ethnic Groups • Krivo (1995) , Coulson (1999): Hispanic- and Asian-immigrants have the lower homeownership rates. • Painter, Yang and Yu (2001, 2003, 2004) : Chinese households have the higher homeownership rates. • Yu (2006): Taiwanese immigrants have the highest homeownership attainmentamong all ethnic Chinese subgroups. • Borjas (2002): homeownership gap between native and immigrant households has widened substantially over the past decades .

6. Table A2. Homeownership Rates by Race and Region in 1990 Source. －Data from Painter, Yang and Yu (2003).

7. Table A3. Homeownership Rates by Race and Birthplace, Los Angeles CMSA, 1980-2000 Source. － Data from Yu (2006).

8. Research Motivations: • Wealth and income are two most important factors in explaining homeownership. • Countries that have high homeownership rates are Singapore and Taiwan in Asia, Spain in Europe; which are not considered to be the richest countries. • The richest countries, such as U.S., Japan, and Germany, do not have high homeownership rates • Chinese has the highest homeownership in the US among all ethnic groups, and Taiwanese has the highest rate among all ethnic Chinese in the US • Factors other than economical ones? Cultural norms!

9. Norm Effects and Homeownership • Assimilation Theory (Gordon, 1964):with learning, sharing and adapting to alternate, different cultures, values and lifestyles, will lead the immigrants to a reduction in ethnic differences and eventually conformity to the mainstream cultural standard. • Segmented Assimilation (Zhou, 1997; Rumbaut, 2000):some immigrants have experienced their distinctive adaptation processes and may develop a behavioral pattern of perpetual ethnic differences.

10. Painter et al. (2003) : Chinese households’ high homeownership rate in the U.S. may be due to factors that are “unmeasured” in the economic data. • Social Norms Model(Akerlof, 1980): If there is a code of behavior as to how individuals should behave, then those who decide to ignore such norms will endanger their reputations and hence obtain disutilities. An individual’s process to achieve his optimization would produce a peer-group externality that would influence others’ decision.

11. Table 1. Homeownership by Age, Education and Income in Taiwan: 1986 and 1993

12. Hsueh and Chen (1999) on Taiwan’s high homeownership rates: two possible explanations (but no evidence of proof) • the first is the Chinese culture norm, • and the second is the long standing subsidy policies employed by the government of Taiwan for the first-time home buyers

13. This research is organized as follows: • Theoretical model; • Data sources and variable definitions; • Econometric model and estimations; • Concluding remarks.

14. II. Theoretical Model • Based on Akerlof’s (1980) setting : (1)

15. Assume that all people believe that the norm does exist in the society, thus . (1’) • budget constraint for “owning a house” : • budget constraint for “renting a house” :

16. When owning a house, • When renting a house, • If , chooses to be an owner-occupier; If , chooses to be a renter. • Given the homeownership rate of peer group , when becomes larger, the norm effect will be higher and hence increase one’s incentive to buy a house.

17. III. Data and Variable Definitions • Data Sources : DGBAS (1986, 1993) • Housing Survey: • housing transaction and rental prices • housing characteristics • demographic characteristics • norm proxy • Survey of Family Income and Expenditure: • household income • demographic characteristics • More detailed definitions for variables are listed in Appendix.

18. IV. Econometric Model and Estimated Results • Step 1: The Estimations of Hedonic Prices and Permanent Income • Hedonic housing prices are defined as the implicit prices that can be derived from the housing attributes that affect the prices. • Permanent income is the appropriate income measure used for estimating the housing demand (See Hansen, Formby and Smith, 1996). In addition, household income may be highly correlated with housing demands, cannot be regarded as an exogenous variable in determining tenure choice.

19. IV. Econometric Model and Estimated Results • Estimations of Hedonic Price and Rent • Hedonic Theory (Rosen, 1974; Ellickson, 1981) : the implicit prices of attributes or characteristics. (4) (5)

20. Figure 2. Trends for Housing Transaction Prices of Four Main Cities in Taiwan

21. Figure 3. Trends for Rental Price Index for Taipei, Kaohsiung and Taiwan

22. Table 3. Estimations for Housing Prices and Rents

24. (2) The Estimation of Permanent Income • Goodman (1988), Hoyt and Rosenthal (1990), Rosenthal, Duca and Gabriel (1991): A permanent income proxy is to regress log of current household income on some socio-economic variables. (6)

25. Table 4. Estimations for Permanent Income

26. Note. － Numbers in the parentheses are t-ratios. ** and * are the significant levels of 1% and 5%, respectively.

27. Step 2: The Estimation of Tenure Choice Model • We use the setting of the “peer effect” from Evans, Oates and Schwab (1992). • cultural-norm variable : the community average homeownership rate where the ith household resides. • We put the imputed income and into a probit model, where • and our cultural-norm model can be written as:

28. cultural norm effect: the sign and magnitude of .

29. Table 5. Probit Estimations for Cultural-Norm Model

31. Summary of results: • NORM has a significantly positive effect on the homeownership rate. • The marginal effect of norms on homeownership is decreased from 1986 (3.4911) to 1993 (3.3982). • has insignificant effect on tenure choice. • has a positive impact on tenure choice.

32. A positive effect on homeownership • When relative cost of owning house is higher, people tend to increase the possibility of owning a house • Under the cultural-norm proposition, one has to possess a property within his life cycle; he would increase the likelihood of owning a house when the housing price increases, expecting that price may go even higher and cost him more to own a property later on. • Housing investment (or speculation) demand for an individual. When the housing transaction price increases, one would increase property holding, expecting to gain a return when the property price trend is up.

33. Step 3: Analysis of Norm Effects by Different subgroups: to see whether norm effects interact with other factors • Clark (2003): the unemployed’s well-being is strongly positively correlated with reference group unemployment (at the regional, partner, or household level), far stronger for men. • Choko and Harris (1990): in North America, homeownership as a cultural norm, but the extent to which people share this norm, varies from place to place. • If norms do exist in a community, the norm effects may be heterogeneous over people with different attributes, such as employment status and locations.

34. Table 6. Norm Effects by Educations, Locations, Ages, Cohorts, and gender

36. Education Levels: • The highest marginal norm effect is EDU4, rather than EDU1 or EDU5. • No matter what the education level is, the marginal effects of norms on homeownership subside after the real estate price hike in 1993. • EDU1 tend to have the least bearing with norms during the real estate price hikes, which the marginal effect is hugely reduced from 0.5286 in 1986 to 0.2382 in 1993.

37. (2) Locations: • Norm effect is the highest in TAICHUNG, and the lowest in OTHERAREA. • Income level is not a cause to different norms effect among all regions. • Norm effects become weaker in most areas of Taiwan in 1993, except for Kaohsiung.

38. (3) Ages and Cohorts: • Those family heads with age of 30-39 have the highest norm effects, whenever in 1986 or 1993. • “Birth year” is not a key factor since the highest norm effect is those cohorts with 1952+ in 1986, while the highest one is the cohorts with 1942-1951 in 1993. • The impacts of cultural norms on homeownership may be not caused by the birth year, but the age of a family head.

39. (4) Gender: • The gender of a family head has a significantly different impact on the cultural-norm effect on tenure choice. • The female family head usually are more attached to the cultural-norm effect on their homeownership

40. V. Concluding Remarks • We use the “cultural norms” to explain Taiwan’s high homeownership rate. • Our empirical evidence shows that Taiwanese residents are heavily influenced by “cultural norms” in their tenure choices. • Family heads with relatively low education backgrounds are more affected by the cultural norms in their tenure choices • Younger family heads’ are more attached to this “cultural norm effect,” and have a higher homeownership rate than that predicted by the theory of life-cycle consumption. • Norm effects are lessened when real estate prices become higher.