A 30-YEAR PERSPECTIVE ON PROPERTY DERIVATIVES: WHAT CAN BE DONE TO TAME PROPERTY PRICE RISK?

Question 1

What are some advantages of property derivatives?

Answer 1

Advantages of property derivatives include the ability to infer information about the future of property prices, hedge against housing price risk, offer insurance products, allow banks to hedge default risk, provide exposure to real estate without ownership, and facilitate the design of reverse mortgages.

Question 2

What factors led to the need for property derivatives in the 1970s?

Answer 2

The need for property derivatives arose in the 1970s due to acceleration in property price growth, unpreparedness of covered mortgages and mortgage-backed securities for elevated inflation, and a shift to adjustable rate mortgages.

Question 3

What are some obstacles to the widespread adoption of property derivatives?

Answer 3

Obstacles to the widespread adoption of property derivatives include index construction mismatch, timing mismatches between real estate indices and derivatives, negligible liquidity due to lack of demand from buyers, modeling challenges, and regulatory issues such as capital requirements for banks.

Question 4

What is the primary challenge associated with the buy side in the property derivatives market?

Answer 4

The primary challenge on the buy side of the property derivatives market is the lack of significant demand from potential buyers. While there may be sellers interested in hedging against a potential decline in prices, finding buyers, such as individuals or institutions willing to take on exposure to real estate through derivatives, remains a significant hurdle.