Working Paper: NBER ID: w9128
Authors: James Banks; Richard Blundell; James P. Smith
Abstract: In this paper, we attempt to explain differences between the US and UK household wealth distributions, with an emphasis on the quite different porfolios held in stock and housing equities in the two countries. As a proportion of their total wealth, British households hold relatively small amounts of financial assets - including equities in stock - compared to American households. In contrast, British households appear to move into home ownership at relatively young ages and a large fraction of their household wealth is concentrated in houseing. Finally, the age gradient in home equity appears to be much steeper in the UK while US households exhibit a steeper age gradient in stock equity. We argue that the higher price housing price volatility in the UK combined with much younger entry into home ownership there are important factors accounting for the relatively small participation of young British householders in the stock market. We show it is important to acknowledge the dual role of housing - providing both wealth and consumption services - in understanding wealth accumulation differences between the US and the UK. Institutional differences, particularly in housing markets, that affect the demand and supply of housing services, turn out to be important in generating portfolio differences between the two countries. In particular, these differences in housing price risk imply steeper life-cycle accumulations in housing and less steep accumulation in stock equity over the life cycle in the UK.
Keywords: household wealth; wealth distribution; housing equity; stock market participation
JEL Codes: D31; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher housing price volatility in the UK (R21) | reduced stock market participation among young households in the UK (D14) |
| younger entry into home ownership (R21) | reduced stock market participation among young households in the UK (D14) |
| institutional differences in housing markets (R31) | differences in housing price risk (R31) |
| differences in housing price risk (R31) | steeper lifecycle accumulations in housing and less steep accumulations in stock equity (G51) |
| younger British homeowners accumulate wealth through housing rather than stock equity (G51) | differences in wealth accumulation patterns (D31) |