Why Do Homeowners Invest the Bulk of their Wealth in their Home?

76 Pages Posted: 7 May 2016 Last revised: 20 Mar 2020

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Sebastien Betermier

McGill University - Desautels Faculty of Management

Date Written: March 18, 2020

Abstract

Despite the well-known benefits of diversification, homeowners invest mostly in their home. A common explanation for this pattern is that homeowners are constrained to fully own the home they want to live in. We refute this explanation and show that the predominance of housing stems from its distinct investment value. We then provide clarity on the value of the housing investment. Because owning a home provides a steady stream of housing consumption, it is equivalent to purchasing a perpetual bond indexed to that home. Housing thus plays a special role in the portfolio as one of the homeowner’s risk-free assets.

Keywords: Portfolio allocation, real estate, hedging

JEL Classification: G11, G12

Suggested Citation

Barras, Laurent and Betermier, Sebastien, Why Do Homeowners Invest the Bulk of their Wealth in their Home? (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=2776350 or http://dx.doi.org/10.2139/ssrn.2776350

Laurent Barras

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Sebastien Betermier (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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