Economists tend to see the world through the lens of their models. In attempting to find causal relationships in the complexities of economic interactions they need to abstract from many details. They make assumptions whenever this allows to simplify the exposition without affecting the results. Crucial assumptions, however, do affect the essential findings and should thus draw particular attention. The neglect of housing as a consumption and investment good in many models of portfolio choice theory may be such a crucial assumption. While this assumption my be justifiable in some cases, I will argue that housing – as a primary residence and not as an investment in a real estate fund – can play a central role in determining optimal asset demand.
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