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Optimal Consumption and Portfolio Choices with Housing Dynamics

Author

Listed:
  • Deng Xiaoyu

    (Department of Marketing, Beijing Technology and Business University, Beijing, China)

  • Liu Xixian

    (Credit Reference Center of The People’s Bank of China, Beijing, China)

  • Sun Qianmin

    (Department of Marketing, Business School, Beijing International Studies University, No.1 Dingfuzhuangnanli, Chaoyang District, Beijing, 100024, China)

  • Wu Banggang

    (Department of Marketing, Southwestern University of Finance and Economics, Sichuan, China)

Abstract

This study develops a dynamic model to analyze the optimal consumption and portfolio choices of households acquiring housing services through renting or owning. The model incorporates time-varying financial constraints, represented by the liquid wealth-to-house value ratio, to provide a unified framework for decision-making. We examine the optimal timing and size of house purchases, highlighting the role of intergenerational transfers in facilitating homeownership. By employing a recursive utility function that disentangles risk aversion from the elasticity of intertemporal substitution, the model extends beyond the limitations of standard CRRA utility. Empirical validation using data from the China Household Finance Survey reveals strong consistency between theoretical predictions and observed household behaviors, offering new insights into housing and portfolio decisions under financial constraints.

Suggested Citation

  • Deng Xiaoyu & Liu Xixian & Sun Qianmin & Wu Banggang, 2025. "Optimal Consumption and Portfolio Choices with Housing Dynamics," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 19(1), pages 1-17.
    • Handle: RePEc:bpj:econoa:v:19:y:2025:i:1:p:17:n:1001
    DOI: 10.1515/econ-2025-0132
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