Hedging Housing Risk

Housing Wealth and Household Portfolios in an Ageing Society

“…For instance, Goetzmann (1993) observed that housing (real estate) has a low or negative correlation with other assets (stocks, bonds), and would therefore in principle be a valuable addition to an investor's portfolio -a conclusion that was confirmed in later work by Englund et al (2002), Iacoviello and Ortalo-Magné (2003) and Quigley (2006). However, Brueckner (1997) pointed out that introduction of the owner-occupied house into the investment portfolio should account for the double role of housing as an asset as well as consumption good.…”

“…Later empirical work has been less favorable, however, regarding the usefulness of the constrained mean-variance model as a descriptive device (see Yamashita (2003), Pelizzon and Weber (2006a, b)). This implies that many households do not realize the gains that would be possible if they were to adjust their portfolio optimally to their owner-occupied house (see Englund et al (2002) for computations of the gains conditional on housing consumption).…”

“…This would come at the 'price' of some kind of an investment trust owning (a potentially large part of) your house. Given the failure of housing partnerships, it is perhaps hardly surprising that such proposals (made, for instance, in Englund et al (2002) and Quigley (2006)) have yet to lead to the introduction of house-price derivatives on financial markets.…”

What factors affect hedging incentives of housing demand?

“…One conceptual issue to be handled very carefully for such hedging instruments is the presence of inefficient market for housing. Englund, Hwang, and Quigley (2002) show large gains from hedging especially to poorer households using options on housing price index in Stockholm. Syz (2007) documents two index based hedging instruments in Switzerland.…”

“…During the (professionally) peak period, they save enough to compensate the dissavings of the past and accumulate assets for future. Regardless of ownership, the average household in the North America and Western Europe spends approximately 25% to 35% of its income on housing (Englund et al (2002)). However, while a household needs housing services in every period, the labor income is uncertain.…”