The Portfolio Implications of Home Ownership

26 Pages Posted: 25 Sep 2002

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE)

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: August 2002

Abstract

This Paper analyses the effects of residential property holdings on optimal investment portfolios. Using a mean-variance framework, we show that residential real estate offers significant diversification benefits relative to investments in stocks and bonds for US investors. Risk averse investors that hold residential real estate for investment purposes have future wealth that is less volatile. For most geographical areas in the US, investors have the best diversification benefits from residential real estate when about 30% of their investment portfolio is residential real estate. In addition to this diversification effect, we find that stocks and bonds do not provide a good hedge for positions in real estate, implying that the relative demand for either is not significantly affected by home ownership. For less risk averse agents the price return on real estate is too low in order to justify inclusion in the investment portfolio. This implies that if agents invest a significant fraction of their wealth in their house, the non-price increase, i.e., the consumption benefits, should be significant. Our estimates suggest that the order of magnitude of these non-price increases is about 10% per year.

Keywords: Portfolio choice, real estate, home ownership

JEL Classification: G11

Suggested Citation

de Roon, Frans A. and Eichholtz, Piet M. A. and Koedijk, Kees G., The Portfolio Implications of Home Ownership (August 2002). CEPR Discussion Paper No. 3501. Available at SSRN: https://ssrn.com/abstract=333703

Frans A. De Roon (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Piet M. A. Eichholtz

University of Maastricht - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883648 (Phone)
+31 43 3258530 (Fax)

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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