Journal of Real Estate Finance and Economics, 29:3, 259±275, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Owner-Occupied Housing and the Composition of the
Household Portfolio: The Case of France
DAVID LE BLANC
CREST-INSEE, 15 boulevard Gabriel Peri, 92240 Malakoff
INSEE, 18 boulevard Adolphe Pinard, 75014 Paris
This paper investigates the impact of housing demand on the composition of the optimal portfolios of
homeowners in France, following the methodology developed by Flavin and Yamashita (NBER Working Paper
6389, 2002). We use historical data on housing prices and ®nancial assets returns to estimate the mean return and
covariance matrix of a set of assets including housing. We then calculate mean-variance ef®cient frontiers
associated to various levels of the housing-to-net wealth ratio, corresponding to the average ratios observed for
different age groups in the 1998 French Wealth Survey sample. Our numerical results ®t the average portfolios in
different age brackets quite well. Also, returns of housing and its covariance with the other assets indicate there is
room in France for housing price derivatives.
Key Words: housing price derivatives, mean-variance portfolio, ef®cient frontiers, homeownership
This paper focuses on the observed age pattern in the portfolios of homeowners in France.
As in other countries (see Flavin and Yamashita, 1998, 2002, for the US; Englund et al.,
2002, for Sweden), the share of housing in the portfolio of French homeowners strongly
decreases with age. This produces a clear age-pro®le in the composition of portfolios at an
aggregate level, younger homeowners holding on average smaller shares of risky ®nancial
assets than older ones. Within the standard mean-variance theory of the portfolio (Fama
and Miller, 1972) applied to ®nancial assets only, this can only result from higher risk
aversion of young households, which seems contrary both to intuition and to empirical
results obtained in different developed countries.
The explicit consideration of housing as an asset helps to solve this puzzle. As is
well known, housing is both a consumption and an investment good. As a result,
homeownership responds to consumption motives as well. One of the ®rst papers dealing
explicitly with the problem is Brueckner (1997). Brueckner combines the Henderson and
Ioannides' (1983, 1987) investment-consumption model with the standard mean-variance
portfolio theory. The main result of the paper is that when the actual housing demand is