A study of the risk-return relationship in the Swedish housing market: evidence from an H-CAPM model

Sammanfattning: This paper investigates the risk-return relationship in the Swedish housing market by testing a housing capital asset pricing model (H-CAPM). The model is applied on one- and two-dwelling houses for permanent living in 238 municipalities between 1982 and 2009. Following the framework of Case, Cotter, and Gabriel (2011), the H-CAPM is a modification of the traditional CAPM in that the aggregate Swedish housing market is used as proxy for systematic risk. The H-CAPM model is further controlled for the inclusion of idiosyncratic risk and housing equivalents of the SMB, HML and momentum factors, as well as a set of common micro- and macroeconomic variables. The time-series and cross-sectional regression results support the single-factor H-CAPM model, and that there is a strong relationship between municipal house price returns and their covariance with the aggregate national housing market portfolio. Moreover, substantial cross-sectional variation is observed, with housing betas ranging from 0.33 to 1.37. The Fama-MacBeth (1973) regressions further suggest that an increase in beta of 0.5 is compensated by an increase in the annual real excess house price return of 2.92%.