Winners and losers?

How to share the gains and spread the risks of housing market dynamics

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Susan J. Smith

‘Home ownership’ societies…

$

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Owners who increased mortgage between 2001 and 2005Australia(n=4,530)

UK(n=3,397)

N % N %

Not withdrawn any equity between 2001-05 2,265 50% 1,408 41%

Observed to MEW in 2001-05 2,265 50% 1,989 59%

How much equity are households withdrawing (2003)?Australia

(N=752) $AUSUK

(n=727) £

Mean Median Mean Median

Equity of MEW HH $216,966 $166,500 £78,090 £60,000

Amount of MEW $54,904 $24,500 £10,757 £6,000

Withdrawal as % of equity 25% 14% 14% 10%

Analysis of BHPS and HILDA by Beverley Searle and Alice Stoakes

Banking on Housing;Spending the Home

An asset to sell: ‘If we are in trouble, we could always sell … it’s reassuring’ [1 in 3]

A resource to tap into to: ‘I value the fact that, if needs be,I can borrow more against it’ [1 in 5]; over half plan to spend part (1:3) or all (1:5) their housingwealth before they die

An insurance as well as an investment: ‘I’d be scuppered if I had a major expenditure to fund without drawing on the mortgage’ [just under 1 in 2: income smoothing/welfare]

Risky business?

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Credit risks

Capital/investmentrisks

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Derivatives

• Financial instruments (contracts) whose values derive from the price of an underlying asset or index

• They can, however, be traded independently, so they are a means of transferring or managing market risk as well as an investment opportunity

The valueof derivatives trading(outstanding contracts)is $450 trillion

Housing, the world’s largest asset class, inspires nearly no derivativestrading at all

Derivatives:The strange case

of housing

The economic logic of housing derivatives

• Housing is a major asset class, but is expensive to hold, slow and costly to trade, and has other complications. Major investment portfolios are under-exposed to housing (which is otherwise a good alternative investment)

• Housing investors, in contrast, are over-exposed to property, vulnerable to price volatility and have no way to hedge.

The social argument…

• ‘Most long term economic risks… [are] borne by each individual or family alone… Many people live in relative poverty today because of a failure to control these risks’ (Shiller 2003)

• The ‘human face’ of capitalism (Caplin et al. 2003)

• How to improve the welfare of European housing consumers at practically no cost (Quigley 2005)

$

$a $b= +

?

Housing: services and investments

Home(SweetHome)

Investment(Future price)

A role for derivatives?

• Savings gateway to home ownership (and labour mobility)

• Improve affordability (lower entry costs)• Enhance sustainability (manage credit risks)• Portfolio rebalancing• Insure asset base for welfare (reduce

investment risks)• Facilitate cost-effective equity release in older

age

False Start?London Futures & Options Exchange

• Yesterday’s launch of a UK property futures market… previous attempts in Chicago, France and Sydney having failed (May 10 1991)

• A predictably slow start (Aug 16 1991)• London Fox closes its property future

market…(October 3 1991)[Reporting from the Financial Times]

Housing (derivative) futures?

Index issues

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The right derivative?

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Culture shift

ConsumerAversion/

financial illiteracy

How to hedge your bets

• Spread-betting: ‘I don’t take unnecessary risks’

• Insurance: ‘Money down the drain’• Hpi-linked savings account: ‘I can see

the benefits of getting the property increases without risking your capital’…

• London index: ‘If you lived in Salford, I think that would be a blinding idea’

ConsumerAversion/

financial illiteracy

ReputationalRisk

Political imagination?Ideas based

Policy?

‘Market institutions are social constructions, artefacts which we

may not have designed…but which we may properly alter and reform so that they better contribute to human

aims’ John Gray (1992)

Winners and losers?

How to share the gains and spread the risks of housing market dynamics

QuickTime™ and aTIFF (LZW) decompressor

are needed to see this picture.

Susan J. Smith