Property Derivatives and Index-Linked Mortgages |
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Authors: | Juerg Syz Paolo Vanini Marco Salvi |
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Institution: | (1) Zurich Cantonal Bank, Zurich, Switzerland |
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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.
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Keywords: | House price risk Mortgage default risk Rent or buy Hedonic index |
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