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

  • Adam W. Shao , Katja Hanewald EMAIL logo and and Michael Sherris
Published/Copyright: December 7, 2017

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.

JEL Classification: C43; G21; R31

Acknowledgements:

The authors acknowledge the financial support from the ARC Linkage Grant Project LP0883398 Managing Risk with Insurance and Superannuation as Individuals Age with industry partners PwC, APRA and the World Bank and from the ARC Centre of Excellence in Population Ageing Research (CEPAR) CE1101029. Adam Shao also acknowledges the financial support from the UNSW Business School. Data provision by Residex Pty Ltd. is kindly acknowledged. John Edwards and Dan Liebke from Residex provided valuable technical support and suggestions. The authors are also grateful to Henderson Koh for his research assistance.

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Published Online: 2017-12-7

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