The housing risk premium in a production economy

This article studies how the housing risk premium is determined in a simple real business cycle model. We present a consumption-based asset pricing model for the housing risk premium and evaluate whether the model is able to explain the observed housing risk premium. Our findings show that a real business cycle model with generalized recursive preferences is able to match the observed housing risk premium. We also find that the volatility of the housing demand shock plays a crucial role in determining the risk–return relationship for housing.