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Residential Real Estate, Risk, Return and Home Characteristics: Evidence from Sydney 2002-14

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  • Daniel Melser

Abstract

Residential real estate is a key component of household wealth. While we have some insight into the aggregate returns of this asset class---thanks to real estate price indexes---we have little understanding of the characteristics of investment in individual properties. This paper outlines and applies a methodology for estimating and examining the variation in risk and return for unique homes. We use large data sets of home prices and rents for Sydney, Australia, from 2002-14, to estimate flexible spline hedonic models which incorporate spatial and characteristics smoothing. Using these models we estimate total returns---the sum of capital gains and rental yield---for a large sample of properties for each time period. This enables use to consider the risk and return of investment in individual parcels of residential real estate and explore the benefits of diversification. As a reference point, we contrast housing with investment in equities. We find that there is dispersion in returns and their volatility---though significantly less than shares---and that this is tied to certain home characteristics. However, when we investigate the benefits of holding a diversified portfolio of homes over a single home we find they are small compared with the corresponding case for equities.

Suggested Citation

  • Daniel Melser, 2017. "Residential Real Estate, Risk, Return and Home Characteristics: Evidence from Sydney 2002-14," ERES eres2017_296, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2017_296
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    References listed on IDEAS

    as
    1. Ruppert,David & Wand,M. P. & Carroll,R. J., 2003. "Semiparametric Regression," Cambridge Books, Cambridge University Press, number 9780521785167.
    2. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    3. Philippe Bracke, 2015. "House Prices and Rents: Microevidence from a Matched Data Set in Central London," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 403-431, June.
    4. Robert J. Hill & Daniel Melser, 2008. "Hedonic Imputation And The Price Index Problem: An Application To Housing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 593-609, October.
    5. Eurostat, 2013. "Handbook on Residential Property Prices Indices," World Bank Publications, The World Bank, number 17280.
    6. Harding, John P. & Rosenthal, Stuart S. & Sirmans, C.F., 2007. "Depreciation of housing capital, maintenance, and house price inflation: Estimates from a repeat sales model," Journal of Urban Economics, Elsevier, vol. 61(2), pages 193-217, March.
    7. Gelain, Paolo & Lansing, Kevin J., 2014. "House prices, expectations, and time-varying fundamentals," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 3-25.
    8. Daniel P. McMillen, 2003. "Neighborhood house price indexes in Chicago: a Fourier repeat sales approach," Journal of Economic Geography, Oxford University Press, vol. 3(1), pages 57-73, January.
    9. repec:eee:regeco:v:66:y:2017:i:c:p:108-118 is not listed on IDEAS
    10. Ruppert,David & Wand,M. P. & Carroll,R. J., 2003. "Semiparametric Regression," Cambridge Books, Cambridge University Press, number 9780521780506.
    11. Daniel Melser & Adrian D. Lee, 2014. "Estimating the Excess Returns to Housing at a Disaggregated Level: An Application to Sydney 2003–2011," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 756-790, September.
    12. Inyoung Kim & Noah D. Cohen & Raymond J. Carroll, 2003. "Semiparametric Regression Splines in Matched Case-Control Studies," Biometrics, The International Biometric Society, vol. 59(4), pages 1158-1169, December.
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    More about this item

    Keywords

    Hedonic regression; House Prices; market model; Residential Real Estate; smoothing spline;

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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