Winners and losers?

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Winners and losers?
Susan J. Smith

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

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Home ownership societies

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Analysis of BHPS and HILDA by Beverley Searle and
Alice Stoakes
Owners who increased mortgage between 2001 and
2005
Australia (n4,530) Australia (n4,530) UK (n3,397) UK (n3,397)
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Not withdrawn any equity between 2001-05 2,265 50 1,408 41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 (N752) AUS Australia (N752) AUS UK (n727) UK (n727)
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
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Banking on Housing Spending the Home
An asset to sell If we are in trouble, we could
always sell its 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 (13) or all
(15) their housing wealth before they die An
insurance as well as an investment Id be
scuppered if I had a major expenditure to fund
without drawing on the mortgage just under 1
in 2 income smoothing/welfare
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Risky business?
Capital/investment risks
Credit risks
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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

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The value of derivatives trading (outstanding
contracts) is 450 trillion
Derivatives The strange case of housing
Housing, the worlds largest asset class,
inspires nearly no derivatives trading at all
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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.

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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)

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Housing services and investments
?

b
a


Home (Sweet Home)
Investment (Future price)
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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

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False Start?London Futures Options Exchange

• Yesterdays 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

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Housing (derivative) futures?
Culture shift
Index issues
The right derivative?
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Consumer Aversion/ financial illiteracy
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How to hedge your bets

• Spread-betting I dont 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

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Reputational Risk
Market institutions are social constructions,
artefacts which we may not have designedbut
which we may properly alter and reform so that
they better contribute to human aims John Gray
(1992)
Consumer Aversion/ financial illiteracy
Political imagination? Ideas based Policy?
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Winners and losers?
Susan J. Smith

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