Hedging Housing Risk in London

Matteo Iacoviello () and Francois Ortalo-Magne ()

No 539, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper investigates the benefits of allowing households to compensate the portfolio distortion due to their housing consumption through investments in housing price derivatives. Focusing on the London market, we show that a major loss from over-investment in housing is that households are forced to hold a very risky portfolio. However, the strong performance of the London housing market means that little is lost in terms of expected returns. Even households with limited wealth are better off owning their home rather than renting and investing in financial assets, as long as they are willing to face the financial risk involved. In this context, access to housing price derivatives would benefit most poor homeowners looking to limit their risk exposure. It would also benefit wealthier investors looking for the high returns provided by housing investments without the costs of direct ownership of properties. Comparisons with French, Swedish and US data provide a broader perspective on our findings.

Keywords: portfolio risk; house price index; hedging (search for similar items in EconPapers)
JEL-codes: E2 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-ure
Date: 2002-10-03
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Forthcoming in Journal of Real Estate Finance and Economics

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Related works:
Working Paper: Hedging Housing Risk in London
Working Paper: Hedging Housing Risk in London (2002)
Journal Article: Hedging Housing Risk in London (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:539

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