RDP 2005-10: Housing and the Household Wealth Portfolio: The Role of Location 5. Conclusions

In this paper we have used a cross-section of household-level data to estimate whether urbanisation has a significant effect on the share of assets that households hold in residential property. Our descriptive results, without controlling for household-specific factors, suggest that there is around an 11 percentage point difference in the share of wealth held in the own home between urban and rural areas. Further, some simple indicators of housing quality suggest that, if anything, the quality of housing in urban areas is lower than that in rural areas. This evidence tends to point to an ‘urban premium’ being paid for housing in populous cities for benefits such as education, infrastructure and more frequent contact with a larger pool of people. One outcome of this ‘urban premium’, in terms of asset allocation, is that households in urban areas tend to have a less diversified portfolio.

Similar to international studies using household-level data, our logistic regression results, which control for other household factors (including income and wealth), confirm that urbanisation has a significantly positive effect on the share of assets held in property. Our results also support the hypothesis suggested by Ellis and Andrews (2001), who use aggregate-level data for Australia, that a high share of wealth in Australia is concentrated in housing because a large proportion of the population is concentrated in urban cities.

For owner-occupiers, we find that a 100 person per square kilometre increase in population density results in a 0.4 percentage point increase in the share of total assets held in property, on average. However, this effect is not constant, with the marginal impact on the share of assets held in property declining at higher levels of urbanisation. This non-linearity appears to reflect the increasing marginal cost associated with having a more concentrated portfolio of assets. This insight follows from our extension to multiple property owners, which implied a linear relationship between the share of the households' own home in total assets and the level of urbanisation. That is, the benefits from urbanisation, over and above the higher income typically associated with cities, appear to rise linearly with population density.