eThesis - Kauppakorkeakoulun sähköiset gradut

DIVERSIFICATION BENEFITS IN FINNISH HOUSING MARKETS

PURPOSE OF THE STUDY This study aims at examining the diversification potentials and gains in the Finnish housing market. The purpose is to find out whether it is worthwhile to create a well diversified housing portfolio or do the benefits from diversification remain too low considering the effort. The first standpoint is, if a housing investor can obtain a statistically significant improvement in risk/return performance by extending a portfolio based on Helsinki by other cities? The second objective of this paper is to test, whether an optimal, geographically diversified housing portfolio results statistically better in risk/return context when compared to a naïve diversified portfolio or not. To evaluate the benefits of diversification truly, the Jobson and Korkie test is used, which compares the performance of two portfolios.

DATA The data applied throughout the study is collected from Statistics Finland. The data set used consists of quarterly observations of dwelling prices in old blocks of flats and annual average level of rents and change in rent levels in non-subsidized dwellings. The data covers fourteen major Finnish cities: Helsinki, Espoo, Vantaa, Tampere, Turku, Oulu, Lahti, Kuopio, Jyväskylä, Pori, Lappeenranta, Rovaniemi, Vaasa and Joensuu In the case of the ten largest cities, the data comprises of 26 years from the year 1983 to 2008 including 104 observations altogether. For the four additional cities, an 12 year long time period is examined, dating from 1997 to 2008, in total 48 observations.

RESULTS On the grounds of the study the attractiveness of inter-city diversification in Finnish housing market seems modest. First of all no diversification among the Finnish cities is needed when constructing the housing portfolio. The study shows that investing in one city only can be statistically sufficient strategy. However Helsinki based portfolio doesn’t seem to be adequate strategy thus expanding the portfolio to Espoo and Vantaa improved the performance and created satisfactory situation. In some cases the need of mathematical programming can be reasonable, but on average the use of MPT approach is not necessary.

Secondly the calculation expose that higher risk doesn’t necessarily mean higher return in every situation. On average correlations are on high level. Additionally the Price-to-Rent ratio exposes the large differences between the cities.

KEYWORDS housing, diversification, Jobson and Korkie test