Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain

This paper studies the investment decision of the Spanish households using a unique data set, the Spanish Survey of Household Finance (EFF). We propose a theoretical model in which households, given a fixed investment in housing, allocate their net wealth across bank time deposits, stocks, and mortgage. Besides considering housing as an indivisible and illiquid asset that restricts the portfolio choice decision, we take into account the financial constraints that households face when they apply for external funding. For every representative household in the EFF we solve this theoretical problem and obtain the theoretically optimal portfolio that is compared with households' actual choices. We find that households significantly underinvest in stocks and deposits while the optimal and actual mortgage investments are alike. Considering the three types of financial assets at once, we find that the households headed by highly financially sophisticated, older, retired, richer, and unconstrained persons are the ones investing more efficiently.