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

Author

Listed:
  • Shao Adam W.

    (Actuarial Studies and Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, Sydney, Australia)

  • Hanewald Katja

    (Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, SydneyNSW 2052, 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)

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.

Suggested Citation

  • Shao Adam W. & Hanewald Katja & Michael Sherris and, 2018. "House Price Models for Banking and Insurance Applications: The Impact of Property Characteristics," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 12(1), pages 1-26, January.
    • Handle: RePEc:bpj:apjrin:v:12:y:2018:i:1:p:26:n:1
    DOI: 10.1515/apjri-2017-0003
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    More about this item

    Keywords

    house price risk; house price index; model comparison; reverse mortgage; mortgage insurance;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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