© 2019, Emerald Publishing Limited.Purpose: Real estate and stocks are two major asset types in an investor’s portfolio. Therefore, this paper aims to investigate the relationship between these two markets to provide a valuable insight into the process of portfolio optimization and security selection. Design/methodology/approach: This study examines the long-run relationship between residential real estate prices and stock market index in the case of Germany for the period of 2005-2017 by applying time series econometrics techniques. To this aim, this study uses Hedonic House Price Index as a proxy for real estate prices and DAX30 as a proxy for stock prices. Moreover, three additional variables, namely, consumer confidence, credit availability and supply of mortgage loans, are incorporated as control variables to assess the robustness of the results. Findings: Obtained empirical results indicate a long-run relationship between stock prices and real estate prices which suggests that in long-run, there is no diversification benefit from allocating stock and real estate assets in a portfolio. This finding is especially important for long-term investors such as pension funds. Originality/value: To the authors’ best knowledge, this is the first study that empirically investigates the relationship between the real estate market and stock prices using the Hedonic Price Index for the case of Germany.