Property Derivatives and Index-Linked Mortgages

Posted: 11 Sep 2007

See all articles by Juerg M. Syz

Juerg M. Syz

Diener Syz Real Estate; University of Zurich

Paolo Vanini

University of Basel

Marco Salvi

Cantonal Bank of Zurich; École Polytechnique Fédérale de Lausanne

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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, 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.

Keywords: house price risk, mortgage default risk, rent or buy, hedonic index

JEL Classification: D14, G10, G21, R31

Suggested Citation

Syz, Juerg M. and Vanini, Paolo and Salvi, Marco, Property Derivatives and Index-Linked Mortgages. Journal of Real Estate Finance and Economics, Vol. 36, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1010440

Juerg M. Syz (Contact Author)

Diener Syz Real Estate ( email )

Dufourstrasse 21
Zollikon, 8702
Switzerland

University of Zurich

Rämistrasse 71
Zürich, CH-8006
Switzerland

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Marco Salvi

Cantonal Bank of Zurich ( email )

P.O. Box
Zurich CH-8010
Switzerland

École Polytechnique Fédérale de Lausanne ( email )

CH-1015 Lausanne
Switzerland

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