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

The special, dual nature of property as both a consumption and an investment good makes it salient for portfolio choice. In fact, the theoretical literature predicts a constraint imposed by property on investment and the empirical literature has brought evidence that this constraint, in some form, exists, but neglecting to investigate its heterogeneity and to differentiate between owner-occupied and investment property. With reference to the predictions from a stochastic control model, we turn to the Wealth and Assets Survey panel for the UK, which allows to break down in detail households' portfolios, to show empirically how the relationship between property and stockholdings depends on the value of property relative to the size of the entire portfolio. While on average, an increase in the share of property in the total portfolio is estimated to correspond to a slight decrease or to no change in the share of stocks in liquid assets, this nexus potentially goes from positive to negative depending on the weight of property in the portfolio. Consistent with the prediction that only consumption-relevant property places a constraint on portfolio choice, the relationship can be identified robustly for owner-occupied property only.