PRIVATE HOMEOWNERSHIP & INVESTMENT IN PROPERTY STOCK - THE SINGAPORE CONTEXT

Abstract

Singapore has a very high rate of homeownership. Beyond individual risk and return characteristics, housing plays a part in the larger portfolio of assets held by a household. The study analyzes the compositions in the private household investment portfolios, which includes private residential housing, common stock, property stock, government five-year bond, and government three-month Treasury bill. Three issues are addressed: the optimal allocation of private housing investment in mean-variance efficient portfolios unrestricted by consumption constraints; the inherent risk in private housing affected by consumption constraints; and the potentials for risk reduction which can be provided by including property stock investment and short selling of property stock and common stock. Evaluation using modern portfolio theory suggests that property stock investment improves the overall return and reduces the volatility of the household portfolios. When comparing at the respective maximum standard deviation where property stock investment is excluded with the portfolios where there is property stock investment, the relative gain in the expected return is smaller for rich private homeowners, but slightly larger for the poor. The drawback is that the poor homeowners will need to take up very risky portfolios. Following the study by Englund et al. (2002), the study further analyses the potential risk reduction for two types of private homeowners, by introducing short positions in both property stock and common stock. In contrast with Englund et al (2002), the results do not show much risk reduction for the two households.