Housing and its Role in the Household Portfolio in Colombia

We examine the optimal allocation of assets in the portfolio of a Colombian homeowner conditional on various levels of the house value to net wealth ratio. The high rate of home ownership and low rates of investment in financial assets indicate that households allocate most of their wealth to housing. Our results suggest that actual allocations are suboptimal and that significant gains can be obtained with a higher degree of diversification. In particular, we find that housing plays a positive role in efficient portfolio allocation when the housing to net wealth ratio is less than 1.5, but when the house value is higher than what the household can afford, it inevitably increases the risk for the household. The housing policy implications is that the results could help define the maximum mortgage that may be granted to a given household and determine which households qualify for housing acquisition or rental subsidies.