Overvaluation in the housing market and its effect on the performance of listed real estate companies

Sammanfattning: In the years 2007-2015 prices for flats in Sweden increased with approximately 80%. Simultaneously, the Swedish real estate index, SX8600PI, increased with 77%, outperforming the OMXSPI by 33%. This paper examines whether a potential overvaluation in the housing market in Sweden can explain some of the abnormal return of Swedish listed real estate companies. Further, the study is extended to include the Danish market. We consider 11 Swedish listed real estate companies and 5 Danish during Q2 2007 - Q1 2015. We regress the abnormal returns over the difference in fundamental and actual house prices. In addition, we examine lagged effects by regressing the abnormal returns over the difference in fundamental and actual house prices the previous quarters. We find explanatory value in the Swedish market but not in the Danish. Based on the results from the Swedish market, investors could, if concluding that the housing market is currently overvalued, increase the probability to obtain abnormal returns the upcoming four quarters by investing in Swedish listed real estate companies.