TRADITIONAL CAPM VERSUS CONSUMPTION CAPM: SINGAPORE �S HOUSING MARKET

Abstract

Housing is both consumption good and investment good (asset) because it can provide shelter and wealth. The traditional CAPM states that to measure an asset’s return, it is essential to understand its systematic risk that is the beta, the covariance between the asset’s return and market return. However consumption CAPM suggests that consumption growth can be potentially a better measurement of beta than the market return in terms of analysing housing return. Several theories such as housing wealth effect, budget constraint and financial norm indicate that indeed there is a significant relationship between housing return (capital gain) and consumption expenditure, which further strengthens the point that consumption expenditure can be potentially a better measurement of the beta. If this is the case then it is important that institutions or developers such as NUS, MAS or CapitaLand take into account consumption expenditure in order to understand what really correlates with house price. This study aims to find out the significance of consumption to measure housing return (capital gain) in Singapore’s housing market and to do a comparison on which variable is more relevant, the market return or consumption growth. Results seem to suggest that consumption indeed plays a role in impacting Singapore’s house price movement. However, market return has a more significant impact than consumption growth.