Speaker: Javier Garcia Gonzalez, Tilburg University
Title: Lifecycle investing when house prices are cointegrated with income
Abstract: This paper studies the possibilities that residential real estate investment brings to lifecycle portfolios by incorporating the long-run relationship between house prices and income into the model. Labor income is at the core of lifecycle models and a significant body of literature argues that income is cointegrated with house prices through rents. Under this hypothesis, residential real estate investment can be used to hedge aggregate-income changes on top of hedging rents. Aggregate-income is very much related to the cost of labor intensive services such as elderly care, health care or education, and these services together with housing can constitute a sizable portion of household budgets. What makes investment in real estate attractive is thus the potential to hedge both housing and labor intensive services by exposing the portfolio to income changes. Preliminary results can rationalize the traditional role of housing, and not stocks, as the primary savings vehicle of households.