The effects of homeownership on stock demand: A housing assignments quasi-experiment

Abstract

• Novel identification strategy evaluates causal homeownership effects. • Robust negative homeownership effects are estimated for European households. • Adverse effects are driven by housing illiquidity and liquidity constraints. • Homeownership helps explain low stock market participation and stock shares. • Findings have important implications for financial stability policy. A persistent puzzle in empirical finance is that households hold far fewer stocks than standard portfolio theory predicts. We examine whether homeownership helps explain this discrepancy. Identifying the effect of tenure status is challenging because homeownership, home equity, and mortgage debt are all endogenous. We address this by instrumenting tenure status with quasi-random housing inheritances and net worth with variation in national house prices across housing markets, using data from the Eurosystem Household Finance and Consumption Survey (HFCS) and Eurostat. In contrast to much of the existing literature, which often reports positive wealth effects of homeownership on stockholding, we find that instrumented homeownership is robustly associated with lower stock demand, once balance sheet positions are properly accounted for. These effects are strongest among younger and financially constrained households and are consistent with theories emphasising housing illiquidity and liquidity constraints. We also document substantial cross-country heterogeneity, reflecting cultural and institutional differences. Our results have several implications for financial regulation and indicate that homeownership contributes to the stockholding puzzle.