Homeownership and Investment in Risky Assets in Europe

Insook Cho

doi:10.5539/res.v6n4p254

Abstract

This study examines how housing influences households’ risky asset holdings in multiple European countries, using the 2004 Survey of Health, Ageing and Retirement in Europe (SHARE) data set. This research provides three major findings. First, homeowners in bank-based economies have a significantly lower probability of participating in the stock market, whereas in market-based economies, homeownership has no significant impact on this probability. Second, homeowners tend to invest a lower share of their financial assets in stocks compared to renters. Third, households with a higher home value to wealth ratio invest a lower share of financial assets in stocks in countries with more developed mortgage markets. In contrast, in countries with underdeveloped mortgage markets, households with a higher home value to wealth ratio invest a larger share of financial assets in stocks. The results of this study suggest that recognizing differences in financial market structures is crucial to understanding the relationship between housing investment and stock investment.

Highlights

In many countries, housing is considered the most important asset in a household’s portfolio
Because this study focuses on the effect of housing investment on risky asset holdings, a dummy variable for homeownership is included in the model
The results reveal that stock holding patterns differ according to the financial market structure of each country

Summary

Introduction

In many countries, housing is considered the most important asset in a household’s portfolio. Adjustment in housing consumption occurs only infrequently (Note 2) because households adjust their housing consumption only if the current consumption deviates from the optimal level to a large enough extent to justify the high transaction costs Housing is both a durable consumption good and an investment good providing a positive expected return. Households often invest in housing through a mortgage contract, and this leveraged position exposes homeowners to risks associated with committed mortgage payments out of an uncertain income stream over a long horizon. Exposure to this “mortgage commitment risk” may induce homeowners to hold more conservative financial portfolios (Fratantoni, 1998; Chetty & Szeidl, 2010). House prices are quite volatile over time, and house price risk induces homeowners to lower their investment in risky financial assets (Cocco, 2005)

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Results

Conclusion