Fractional Homeownership and its Impact on Life Cycle Portfolio Choice

Using a rich and realistically calibrated life cycle model, we study the impact of access to fractional homeownership on individuals’ optimal consumption, savings, and housing decisions. Fractional homeownership means that two parties—an individual and an institutional investor—share full ownership of a property. The individual lives in the property full-time and makes periodic rent payments to the institutional investor, who sees the property solely as an investment vehicle. The amount of the rent payments depends on the value of the home and the fractional ownership structure that can be time-varying. This form of real estate ownership structure is becoming increasingly popular in several countries such as China and Norway (there known as partial homeownership) and the UK (there known as shared
ownership). We find that access to fractional homeownership is most attractive to young, liquidity-constrained individuals who enter the housing market by buying small fractions of their property and old individuals who are in the process of decumulating their savings and are selling fractions of their property as they get older. Further, it leads to earlier housing market entry, later housing market exit, decreases individuals’ loan-to-value ratios, and reduces their moving activity at old age; all in comparison to a setting in which the individuals’ rent-versus-own decisions are binary.