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Optimal portfolio choices and the determination of housing rents under housing market uncertainty

Gang-Zhi Fan, Ming Pu, Xiaoying Deng and Seow Eng Ong

Journal of Housing Economics, 2018, vol. 41, issue C, 200-217

Abstract: This study proposes a utility indifference-based model to investigate the pricing issue of house rents under housing market uncertainty. Our model not only allows for the crucial features in the housing market, such as market incompleteness and high idiosyncratic risk, but also the interaction of households’ house tenure choices with their financial asset holdings. Our model provides interesting insights into the hedging of house market risk and determination of housing rents. In addition to the parameters describing the expected changes and volatility on stock and house returns, we also show that individual precautionary savings motive, idiosyncratic risk premium, and the correlation between stock and housing have important implications for the determination of housing rents. We also test the model predictions empirically using the data from major Asian markets and the empirical results better support the model predictions.

Keywords: Tenure choice; Resale risk; Reservation rent; Utility maximization; Incomplete markets (search for similar items in EconPapers)
JEL-codes: G11 R20 D52 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jhouse:v:41:y:2018:i:c:p:200-217