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Optimal portfolio choices and the determination of housing rents under housing market uncertainty

Author

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  • Fan, Gang-Zhi
  • Pu, Ming
  • Deng, Xiaoying
  • Ong, Seow Eng

Abstract

This study proposes a utility indifference-based model to investigate the pricing issue of house rents under housing market uncertainty. Our model not only allows for the crucial features in the housing market, such as market incompleteness and high idiosyncratic risk, but also the interaction of households’ house tenure choices with their financial asset holdings. Our model provides interesting insights into the hedging of house market risk and determination of housing rents. In addition to the parameters describing the expected changes and volatility on stock and house returns, we also show that individual precautionary savings motive, idiosyncratic risk premium, and the correlation between stock and housing have important implications for the determination of housing rents. We also test the model predictions empirically using the data from major Asian markets and the empirical results better support the model predictions.

Suggested Citation

  • Fan, Gang-Zhi & Pu, Ming & Deng, Xiaoying & Ong, Seow Eng, 2018. "Optimal portfolio choices and the determination of housing rents under housing market uncertainty," Journal of Housing Economics, Elsevier, vol. 41(C), pages 200-217.
    • Handle: RePEc:eee:jhouse:v:41:y:2018:i:c:p:200-217
    DOI: 10.1016/j.jhe.2018.06.003
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    More about this item

    Keywords

    Tenure choice; Resale risk; Reservation rent; Utility maximization; Incomplete markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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