Efficient Portfolios Conditional on Housing: Evidence from the UCI Survey

Loriana Pelizzon, University of Padua
Guglielmo Weber, University of Padua, CEPR, IFS

In our application we use UCS household portfolio data and time series data on financial assets and housing stock returns. We first consider purely financial portfolios and then portfolios where the housing stock is treated as a given asset. In both cases we find that households with higher financial wealth have more efficient portfolios, that those that take portfolio decision on their own are less likely to be efficient. However, our empirical results highlight that the presence of housing risk plays a key role in determining which household portfolios are efficient. They also point to the need to distinguish between households who are long on housing (homeowners whose housing needs are declining) or short on housing (tenants and homeowners whose housing needs are still increasing). We find that households who are long on housing are more efficient if they have a mortgage because of the positive correlation between housing returns and long term bonds.

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