Abstract
It is well known that risk factors influence how investment portfolios perform from a lender’s perspective; therefore, a thorough risk assessment of the housing market is vital. The aim of this paper was to analyze the risks from housing apartments in different housing market segments by using the Stockholm, Sweden, owner-occupied apartment market as a case study. By applying quantitative and systems engineering methods, we (1) established the relationship between the overall housing market and several housing market segments, (2) analyzed the results from the quantitative model, and (3) finally provided a feasible portfolio regarding risk control based on the given data. The goal was to determine how different housing segment factors could reveal risk towards the overall market and offer better outlooks for risk management when it comes to housing apartments. The results indicated that the risk could be reduced at the same time as the return increased. From a lender’s perspective, this could reduce the overall risk.
Highlights
Over the past 20 years, housing prices in Sweden have risen rapidly
The results showed that with the optimal weight, the average return was higher, that is, the appreciation of the houses in the lenders’ portfolio increased more over time at the same time that the risk/volatility was lower
The optimal weight (AHP-D) return series was skewed to the right, that is, the right tail of the distribution was long relative to the left tail
Summary
Over the past 20 years, housing prices in Sweden have risen rapidly. Sweden’s present housing price boom started in the mid-1990s, after the recovery from a financial crisis caused by a previous housing boom. According to public data, during the period of 1996 to 2007, caused by increasing average disposable income, the house prices in Stockholm increased by more than 200 percent, at the same time as the reduction in the cost of capital due to the low-interest rate environment in Sweden and elsewhere worldwide. Higher house prices have increased the interest rate sensitivity as the household debt (higher leverage) has increased substantially over this period. In a recent article by Cerutti et al (2017), the results indicated that the risk in the economy increased if both a financial boom and a house price boom were observed. Risks exist because the housing market is sensitive due to changes in economic-social characteristics such as income, interest rates, and household formation as well as irrational and speculative behavior from buyers and sellers (Shiller 2014). Agnello and Schuknecht (2011) showed that the probability for booms and busts in housing markets were determined by, for example, domestic credit liquidity and interest rates
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