The Role of Real Estate in Finance



This paper summarizes the role of real estate in finance by briefing Yoshida (2008)without a mathematical equation. I particularly show that land supply elasticity, which is one of the fundamentals in real estate markets, critically influences the correlation between housing and stocks, the optimal equity holdings of households, and risk premia on various assets. Specifically, in such a country with inelastic land supply as Japan, 1) the correlation between housing prices and stock prices is high, and thus, optimal equity holdings by households are small, and 2) the risk premium is high due to a high price of risk, which makes households appear more risk averse.