While residential real estate is a key component of household wealth little is known about the investment characteristics of different types of properties. This paper outlines and applies a methodology for examining the variation in risk and return of individual homes. We use large data sets of home prices and rents for Sydney, Australia, from 2002-14, to estimate flexible spline hedonic models which incorporate spatial and characteristics smoothing. Using these models we construct unique home price and rental estimates for a large sample of properties for each time period. These imputations are used to examine the dynamics of risk and return for residential real estate by estimating a market model on total returns. We find that both the returns and their volatility are tied to certain home characteristics such as the region of the residence and whether the property is a house or apartment. Perhaps most surprisingly we find that there was a negative correlation between risk and return in the Sydney housing market over the period examined.
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