Evidence on the Determinants and Variation of Idiosyncratic Risk in Housing Markets

Using around 1 million repeat sales, we show idiosyncratic risk in real house price appreciation is time-varying, depends negatively on the initial house price, varies across locations, and decreases with the holding period. These systematic movements in idiosyncratic risk can be explained by time and regional variations in market thinness and differences in information quality across markets. We find borrowing costs and deposit requirements have offsetting effects on risk. Higher interest rates are associated with lower idiosyncratic pricing, while tighter deposit requirements are associated with shorter holding periods, which are subject to a higher risk. Finally, we find the systematic variations in idiosyncratic housing risk tend to be positively associated with excess capital returns. However, the risk–return trade-off emerges only through risk differences across house prices and holding periods, while idiosyncratic risk differences across time and regions are not rewarded in excess capital returns.