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An examination of the risk-return relation in the Australian housing market

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  • Chyi Lin Lee

Abstract

Purpose - Extensive studies have investigated the relation between risk and return in the stock and major asset markets, whereas little studies have been done for housing, particularly the Australian housing market. This study aims to determine the relationship between housing risk and housing return in Australia. Design/methodology/approach - The analysis of this study involves two stages. The first stage is to estimate the presence of volatility clustering effects. Thereafter, the relation between risk and return in the Australian housing market is assessed by using a component generalised autoregressive conditional heteroscedasticity-in-mean (C-CARCH-M) model. Findings - The empirical results show that there is a strong positive risk-return relationship in all Australian housing markets. Specifically, comparable results are also evident in all housing markets in various Australian capital cities, reflecting that Australian home buyers, in general, are risk reverse and require a premium for higher risk level. This could be attributed the unique characteristics of the Australian housing market. In addition, there is evidence to suggest that a stronger volatility clustering effect than previously documented in the daily case. Practical implications - The findings enable more informed and practical investment decision-making regarding the relation between housing return and housing risk. Originality/value - This paper is the first study to offer empirical evidence of the risk-return relationship in the Australian housing market. Besides, this is the first housing price volatility study that utilizes daily data.

Suggested Citation

  • Chyi Lin Lee, 2017. "An examination of the risk-return relation in the Australian housing market," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 10(3), pages 431-449, June.
    • Handle: RePEc:eme:ijhmap:ijhma-07-2016-0052
    DOI: 10.1108/IJHMA-07-2016-0052
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