House Price Risk Models for Banking and Insurance Applications

37 Pages Posted: 18 Nov 2011

See all articles by Katja Hanewald

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR)

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Date Written: November 17, 2011

Abstract

The recent international credit crisis has highlighted the significant exposure that banks and insurers, especially mono-line credit insurers, have to residential house price risk. This paper provides an assessment of risk models for residential property for applications in banking and insurance including pricing, risk management, and portfolio management. Risk factors and heterogeneity of house price returns are assessed at a postcode-level for house prices in the major capital city of Sydney, Australia, over the period 01-1979 to 03-2011. The paper shows how a significant proportion of house price variability is due to heterogeneity requiring broader risk assessment than market-wide house price indices. Although time series models of market price indices capture the temporal risks of house prices, panel data models with random effects and variable slopes are required to capture cross-sectional heterogeneity and to quantify the risk of postcode-level house prices compared to the market price index. Macroeconomic and financial variables, as well as geographic and socio-demographic postcode characteristics are shown to be important house price risk factors.

Keywords: house price risk, statistical models, risk management

JEL Classification: G21, G22, G32, R31, L85

Suggested Citation

Hanewald, Katja and Sherris, Michael, House Price Risk Models for Banking and Insurance Applications (November 17, 2011). UNSW Australian School of Business Research Paper No. 2011ACTL11. Available at SSRN: https://ssrn.com/abstract=1961402

Katja Hanewald (Contact Author)

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

School of Risk & Actuarial Studies
UNSW Sydney
Sydney, New South Wales NSW 2052
Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

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