The heterogeneous relationship of owner-occupied and investment property with household portfolio choice

Abstract

The dual nature of property as both a consumption and investment good presents a challenge for household portfolios. Prior theoretical literature predicts a constraint imposed by property on investment decisions, and empirical studies support this notion. However, previous research often overlooks investigating the heterogeneity of this constraint and fails to differentiate between owner-occupied and investment property. Building on a stochastic control model, we analyse the UK’s Wealth and Assets Survey panel and find that along the distribution of how household allocate their wealth a one percentage point (pp) increase in the share of owner-occupied property in the total portfolio is associated with a 0.07 pp decrease in the share of stocks in liquid assets. However, this association varies significantly based on the value of the owner-occupied property share. For low values of the owner-occupied property share, the association with stockholdings is negligible. As the share of owner-occupied property increases, the negative association with stockholdings becomes more pronounced: when the owner-occupied property share reaches 90%, a further 1 pp increase corresponds to a 0.14 pp decrease in the share of stocks in liquid assets. By contrast, buy-to-let property shows no significant relationship with stockholdings, supporting the idea that the constraint on portfolio decisions is primarily driven by the role of property as a consumption good.