Optimal Consumption and Portfolio Choices with Housing Dynamics

Deng Xiaoyu, Liu Xixian, Sun Qianmin () and Wu Banggang
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Deng Xiaoyu: Department of Marketing, Beijing Technology and Business University, Beijing, China
Liu Xixian: Credit Reference Center of The People’s Bank of China, Beijing, China
Sun Qianmin: Department of Marketing, Business School, Beijing International Studies University, No.1 Dingfuzhuangnanli, Chaoyang District, Beijing, 100024, China
Wu Banggang: Department of Marketing, Southwestern University of Finance and Economics, Sichuan, China

Economics - The Open-Access, Open-Assessment Journal, 2025, vol. 19, issue 1, 17

Abstract: This study develops a dynamic model to analyze the optimal consumption and portfolio choices of households acquiring housing services through renting or owning. The model incorporates time-varying financial constraints, represented by the liquid wealth-to-house value ratio, to provide a unified framework for decision-making. We examine the optimal timing and size of house purchases, highlighting the role of intergenerational transfers in facilitating homeownership. By employing a recursive utility function that disentangles risk aversion from the elasticity of intertemporal substitution, the model extends beyond the limitations of standard CRRA utility. Empirical validation using data from the China Household Finance Survey reveals strong consistency between theoretical predictions and observed household behaviors, offering new insights into housing and portfolio decisions under financial constraints.

Keywords: housing; optimal consumption; portfolio choice; risk aversion; intergenerational transfer (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:econoa:v:19:y:2025:i:1:p:17:n:1001

DOI: 10.1515/econ-2025-0132

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