Property Derivatives and Index-Linked Mortgages

Property Derivatives and Index-Linked Mortgages Economists have forcefully argued for the introduction and use of property derivatives as a hedge against house price risk (e.g. Shiller and Weiss, J. Real Estate Finance Econ., 19(1):21–47, 1999). The rationale for these financial instruments seems clear, as many households are heavily invested in housing and standard financial instruments offer a poor hedge. In practice, however, most of the property derivatives available have been targeted to meet the needs of institutional investors, not those of owner-occupiers. Building on the recent launch of the first Swiss property derivative, we here propose index-linked mortgages tailored to retail consumers. The payments of these mortgages depend on the corresponding housing market performance. We further price the instruments, discuss the stabilization of the homeowner’s net wealth, and quantify the expected decrease in the mortgage default risk achieved by this immunization effect. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Property Derivatives and Index-Linked Mortgages

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-007-9071-5
Publisher site
See Article on Publisher Site

Abstract

Economists have forcefully argued for the introduction and use of property derivatives as a hedge against house price risk (e.g. Shiller and Weiss, J. Real Estate Finance Econ., 19(1):21–47, 1999). The rationale for these financial instruments seems clear, as many households are heavily invested in housing and standard financial instruments offer a poor hedge. In practice, however, most of the property derivatives available have been targeted to meet the needs of institutional investors, not those of owner-occupiers. Building on the recent launch of the first Swiss property derivative, we here propose index-linked mortgages tailored to retail consumers. The payments of these mortgages depend on the corresponding housing market performance. We further price the instruments, discuss the stabilization of the homeowner’s net wealth, and quantify the expected decrease in the mortgage default risk achieved by this immunization effect.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Aug 15, 2007

References

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