Économie et Statistique n° 472-473Wealth and savings behaviour - The input of the 2010 Wealth survey: savings behaviour, inequalities, retirement and lifecycle, behaviour when faced with risk
Real estate ownership: how does it influence the financial portfolio of households?
Real estate is often the largest financial asset of the household. It is also, however, a consumer durable, the transaction costs of which, both on purchase and on sale, are high. This twofold characteristic is reason enough to assess the influence of the real estate investment on the composition of the financial portfolio of households. To that end, we attempt to identify two opposite effects: one, the so-called “wealth” effect, the other the real estate risk effect. Any increase in real estate wealth is an encouragement to hold a more risky financial portfolio, whereas real estate risk tends to reduce the holding of risky assets. To separate those two effects, use is made of the indirect method put forward by Chetty and Seizdl (2010) whereby the wealth effect is captured by the variations in net real estate wealth still to be reimbursed and the risk effect is captured by the variations in its net value. The hypothesis is that any increase in net wealth at a given level of gross wealth corresponds to an increase in the real estate wealth of the household without its level of exposure to real estate risk being modified. The effect will therefore measure a pure wealth effect. This approach nonetheless poses a problem of endogeneity. Those households owning the greatest real estate assets and which have the least need to incur debt are generally speaking the richest and therefore those who take the greatest financial risks. This problem can be solved by instrumenting the net and gross wealth by the price variations observed locally. Two expected and opposite effects are thus obtained: the wealth effect tends to increase the proportion of risky assets in the portfolio whereas the real estate risk effect tends to decrease that proportion. According to our estimates, the wealth effect is greater than the real estate risk effect.