Housing and portfolio choice: Evidence from urban China

Abstract

Standard theory predicts that homeownership has both substitution and diversification effects on a household's investments in risky financial assets. Findings from previous empirical studies are inconclusive regarding the net effect. Using data from three surveys in urban China, this study investigates whether homeownership crowds out investments in risky financial assets. The study finds that owing a home decreases a household's probability of participating in the financial market and reduces its total amount of risky financial assets and the share in total household wealth. The crowd-out effect of homeownership on household risky financial asset investment is heterogeneous. Different from existing studies, the mechanism of the crowd-out effect is liquidity constraints rather than mortgage commitment risk, and households with multiple houses also show diversified asset allocation characteristics in China.