Housing wealth changes during parents’ lives impact children’s wealth, education, and earnings in adulthood. The NBER Working Paper (The Intergenerational Transmission of Housing Wealth by N. Meltem Daysal, Michael F. Lovenheim & David N. Wasser) examines this effect. This study is based on examining the correlation between parents’ housing wealth during childhood and the children’s outcomes later in life, leveraging data from Denmark.
Why it matters
Changes in parents’ housing wealth can indirectly impact their children’s wealth accumulation in the future. This effect is especially significant for wealth changes during early and middle childhood but not as much during the teenage years. Since housing constitutes a substantial component of wealth for many households, it is crucial to comprehend the implications of housing market volatility, as it has long-term consequences for future generations.
By the numbers
- A 100,000 DKK increase in parental housing wealth during ages 0-5 and 6-11 led to a 2.1% and 0.9% likelihood increase of homeownership for their children by age 29-33.
- This same increase during childhood contributed to 0.06-0.07 more years of educational attainment for the child.
- Children between ages 0-5 and 6-11 who experienced parental wealth gains had increased annual earnings by 5,630 DKK ($833) and 3,380 DKK ($500), respectively, in adulthood.
- Educational and Earnings Impact: The effects on children’s education and earnings account for 20-30% of the transmission of housing wealth changes during early-mid childhood to adult wealth. Education and earnings can explain at most 20-30% of the wealth transmission.
- Unobserved Parental Behaviors: A crucial takeaway is the role of parental behavior in transmitting wealth. Parental behaviors, like their savings and investments, significantly shape their children’s behaviors.
- Number of Children in the Household: The transmission of housing wealth is primarily unrelated to the number of children, suggesting that the underlying mechanism isn’t merely financial but behavioural.
- Past studies, like Fagereng et al. (2021), also found a significant portion of the impact on children’s wealth accumulation unexplained by observable mediators.
- Works by Boserup, Kopczuk, and Kreiner (2018) and Kreiner, Leth-Petersen, and Willerslev-Olsen (2020) align with the current study’s findings, emphasizing the intergenerational transmission of behaviors, especially around savings.
- Policy implications: In addtion to policies to increase housing supply, supportive policies for parents, especially those with young children, can foster more significant wealth accumulation for future generations.
- Behavioral Interventions: The dominant role of parental behaviors in wealth transmission suggests that targeted interventions, like financial literacy programs, can also make a difference.
- Future Research: Exploring how parental behaviors are influenced by wealth fluctuations and the subsequent effects on future generations could provide further insights into the intergenerational wealth transmission process.
The bottom line
Parents’ housing wealth and associated behaviors are pivotal in shaping their children’s financial outcomes in adulthood. Understanding these mechanisms is crucial for both policymakers and families navigating economic volatility.