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Home equity insurance

Author

Listed:
  • Dag Einar Sommervoll
  • Gavin Wood

Abstract

Purpose - This paper aims to study to what extent an insurance based on a house price index provides equity protection for homeowners. Design/methodology/approach - The paper uses a novel dataset of all housing market transactions in the metropolitan area of Melbourne 1990‐2006, to construct repeated sales indices of various temporal spatial aggregation. These indices are used to discuss the efficiency of index‐based insurance schemes. The paper also considers efficiency under different specifications of legitimate claims. Findings - It is found that the payout efficiency is surprisingly stable (around 50 percent) for all temporal spatial aggregations. A neighborhood index outperforms the metropolitan index with respect to target efficiency (the probability of payout given a loss). The introduction of maturity times, say legitimate claim five years after purchase, does improve efficiency somewhat. However, the idiosyncratic component of housing market transactions remains high, and the insurance probably unattractive from a homeowner perspective. Originality/value - To the authors' knowledge, this is the first time an index‐based insurance scheme is analyzed using real‐market transactions.

Suggested Citation

  • Dag Einar Sommervoll & Gavin Wood, 2011. "Home equity insurance," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(1), pages 66-85, April.
    • Handle: RePEc:eme:jfeppp:v:3:y:2011:i:1:p:66-85
    DOI: 10.1108/17576381111116768
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    References listed on IDEAS

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    1. Sharon Parkinson & Beverley Searle & Susan Smith & Alice Stoakes & Gavin Wood, 2009. "Mortgage Equity Withdrawal in Australia and Britain: Towards a Wealth-fare State?," European Journal of Housing Policy, Taylor and Francis Journals, vol. 9(4), pages 365-389.
    2. Mark Bertus & Harris Hollans & Steve Swidler, 2008. "Hedging House Price Risk with CME Futures Contracts: The Case of Las Vegas Residential Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 37(3), pages 265-279, October.
    3. Andrew Benito, 2009. "Who Withdraws Housing Equity and Why?," Economica, London School of Economics and Political Science, vol. 76(301), pages 51-70, February.
    4. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
    5. Sharon Parkinson & Beverley Searle & Susan Smith & Alice Stoakes & Gavin Wood, 2009. "Mortgage Equity Withdrawal in Australia and Britain: Towards a Wealth-fare State?," European Journal of Housing Policy, Taylor and Francis Journals, vol. 9(4), pages 365-389.
    6. Dag Sommervoll, 2006. "Temporal Aggregation in Repeated Sales Models," The Journal of Real Estate Finance and Economics, Springer, vol. 33(2), pages 151-165, September.
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    Cited by:

    1. Katja Hanewald & Michael Sherris, 2013. "Postcode-Level House Price Models for Banking and Insurance Applications," The Economic Record, The Economic Society of Australia, vol. 89(286), pages 411-425, September.
    2. Felix Schindler, 2014. "Persistence and Predictability in UK House Price Movements," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 132-163, January.
    3. Katja Hanewald & Michael Sherris, 2011. "House Price Risk Models for Banking and Insurance Applications," Working Papers 201118, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.

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