The Heterogeneous Relationship of Owner-Occupied and Investment Property with Household Portfolio Choice

Abstract

The special, dual nature of property as both a consumption and an investment goodmakes it salient for portfolio choice. In fact, the theoretical literature predicts a con-straint imposed by property on investment and the empirical literature has broughtevidence that this constraint, in some form, exists, but neglecting to investigate its het-erogeneity and to differentiate between owner-occupied and investment property. Withreference to the predictions of a stochastic control model, we turn to the Wealth and As-sets Survey panel for the UK, which allows to break down in detail households’ port-folios, to show empirically how the relationship between property and stockholdingsdepends on the value of property relative to the size of the entire portfolio. While onaverage, an increase in the share of property in the total portfolio is estimated to cor-respond to a slight decrease or to no change in the share of stocks in liquid assets, thisnexus potentially goes from positive to negative depending on the weight of propertyin the portfolio. Consistent with the prediction that only consumption-relevant prop-erty places a constraint on portfolio choice, the relationship can be identified robustlyfor owner-occupied property only.