Consumption Volatility: the Role of Homeownership as a Protection against Uninsurable Risks and Italian Owners’ Preferences

Home equity is the most important wealth component of household wealth in many countries. This fact is particularly true in Italy where the percentage of homeownership is above 70 percent and has been continuously increasing in the last 20 years. Moreover, housing is at the same time one of the most critical consumption and investment decisions for families over the life-cycle involving both the amount of housing service to consume and whether to associate consumption with property. This paper investigates the relationship between homeownership and households' consumption dynamics, through an empirical analysis based on the longitudinal section of Bank of Italy - SHIW microdata. In particular, it aims at disclosing possible bidirectional links which will allow to better analyze, also in a dynamic perspective, the likely distributional implications of housing and house wealth. According to our main results, homeowner households show a more stable consumption profile since, on the one hand, house property improves consumption smoothing by favouring a better access to credit. In this channel we can recognize a direct causal link between homeownership and consumption volatility. On the other, however, homeowners show greater stability in their income profiles which seems to be explained by a lower propensity to invest in risky assets. This represents an indirect or inverse channel (reverse causality), since the decision whether to combine housing service with property depends also on preferences and the lower observed volatility is thus an effect of risk aversion. Such results, besides providing new microeconomic insights on inequality and well-being, could suggest macro implications with reference to the low volatility of Italian aggregate time series on consumption, combined with slow income growth.