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Residential Real Estate in Europe: An Exploration of Common Risk Factors

Author

Listed:
  • Druica Elena

    (Faculty of Business and Administration, University of Bucharest)

  • Valsan Calin

    (Williams School of Business, Bishop’s University)

  • Ianole Rodica

    (Faculty of Business and Administration, University of Bucharest)

Abstract

We conduct an exploratory analysis using proxy measures of cross-sectional returns and rental yields in residential real estate. Asset pricing models predict that expected returns should exhibit some sensitivity to one or several fundamental variables that represent a common source of undiversifiable risk. Residential real estate, just like works of art and collectibles, is unique because it represents both an investment vehicle and a durable consumption good. Its pricing and returns should thus reflect both the benefits from portfolio diversification and the effect of supply and demand. In this paper, we investigate the variation in proxy returns and proxy rental yields across 34 major European cities, using a handful of independent variables that should account for the influence of market risk, inflation, and liquidity. In spite of obvious limitations stemming from our sample, we find that the explanatory power of our model is unusually high for a cross-sectional data analysis. Some of our findings concur with other studies showing that in spite of strong segmentation, real estate markets respond to the same structural risk factors. A good portion of our results, however, is hard to explain and interpret. Either we need to take into account cultural differences between Eastern and Western Europe as part of a behavioral approach, or we have to concede that we have been misled by the mismatch in the level of aggregation and the crude estimation of the dependent variables.

Suggested Citation

  • Druica Elena & Valsan Calin & Ianole Rodica, 2015. "Residential Real Estate in Europe: An Exploration of Common Risk Factors," Review of Economic Perspectives, Sciendo, vol. 15(4), pages 413-429, December.
    • Handle: RePEc:vrs:reoecp:v:15:y:2015:i:4:p:413-429:n:5
    DOI: 10.1515/revecp-2015-0028
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    Citations

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    Cited by:

    1. Pavel Pelech & Jaroslava Dědková, 2024. "The Stranger Factor: How Familiarity Influences Sharing Behaviour across Generations," Central European Business Review, Prague University of Economics and Business, vol. 2024(3), pages 49-73.
    2. Jean-François Carpantier & Christelle Sapata, 2020. "The Ups and Downs of European Real Estate Markets’ Integration," Finance, Presses universitaires de Grenoble, vol. 41(2), pages 109-139.

    More about this item

    Keywords

    Residential real estate; returns; yields; behavior economics; Eastern Europe;
    All these keywords.

    JEL classification:

    • P50 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - General
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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