The Journal of Real Estate Finance and Economics

, Volume 27, Issue 2, pp 191–209 | Cite as

Hedging Housing Risk in London

  • Matteo Iacoviello
  • François Ortalo-Magné
Article

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 U.S. data provide a broader perspective on our findings.

portfolio risk house price index hedging 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Matteo Iacoviello
    • 1
  • François Ortalo-Magné
    • 2
    • 3
  1. 1.Department of EconomicsBoston College, Carney HallChestnut HillU.S.A.
  2. 2.Department of EconomicsLondon School of EconomicsLondonU.K.
  3. 3.Department of Real Estate and Urban Land EconomicsUniversity of WisconsinMadisonU.S.A.

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