House Price Models for Banking and Insurance Applications: The Impact of Property Characteristics

Shao Adam W. (), Katja Hanewald and Michael Sherris and ()
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Shao Adam W.: Actuarial Studies and Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, Sydney, Australia
Michael Sherris and: School of Risk & Actuarial Studies and Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, Sydney, Australia

Asia-Pacific Journal of Risk and Insurance, 2018, vol. 12, issue 1, 26

Abstract: House price indices are needed to assess house price risk in households’ portfolio allocation decisions and in many housing-related financial products such as reverse mortgages, mortgage insurance and real estate derivatives. This paper first introduces nine widely-used house price models to the insurance, risk management and actuarial literature and provides new evidence on the relative performance of these models. We then show how portfolio-level house price indices for properties with specific physical and locational characteristics can be constructed for these different models. All analyses are based on a large dataset of individual property transactions in Sydney, Australia, for the period 1971-2011. The unrestricted hedonic model and a hybrid hedonic repeat-sales model provide a good model fit and reliable portfolio-level house price indices. Our results are important for banks, insurers and investors that have exposure to house price risks.

Keywords: house price risk; house price index; model comparison; reverse mortgage; mortgage insurance (search for similar items in EconPapers)
JEL-codes: C43 G21 R31 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/apjri-2017-0003

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