Housing Risk and Property Derivatives: the Role of Financial Engineering

In many countries, tax authorities treat building savings favorably, in order to incentivize homeownership. A solution that addresses home price risk can be provided by using property derivatives. Index-linked mortgages thus provide Pareto improvements by allocating collateral risk more optimally and by reducing the number of default and related costs. Housing is one of the biggest financial assets that most households will ever own. However, management of housing risk is difficult, since there are virtually no instruments that insure against rising or falling home prices. The financial solutions which are described in this chapter would be able to allocate risks and returns more appropriately. Linking the financial instruments that are commonly used in the context of housing, building savings, and mortgages, to a home price index addresses the issues naturally