||This study reveals the evidence of inefficient and divided English and Wales residential real estate market. We examine the relationship between return and risk at a sub-regional level housing markets of the country. The links among the two variables and other housing market and economic factors are investigated with a purpose to explain why the markets do not always follow normal economic practice, according to which, return should be higher in more volatile areas. Additionally, we look for spatial relationships between the markets. We begin with identifying the housing market factors. We proceed by calculating risk ratios, such as standard deviation or market risk (beta) ratio from CAPM model. After that, we continue with spatial diagnostics and multiple and spatial regression models. The results show a very strong spatial autocorrelation among returns of the house price indices in neighbouring areas, while controlling for economic, demographic, liquidity and size factors. However, spatial autocorrelation among risk ratios is of much lower significance or not significant at all. The findings disclose that some local property markets have had returns inadequate to risk, thus proposing adjustments in investment decisions making.