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House Price Insurance (Possible?)

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Why isn't this possible?

You buy a house, agree principal etc, arrange mortgage etc. and buy an insurance policy against a material decline in the value of your house over the mortgage term.

Could structure it in different ways: HPI payable to insurance co. (on sale) but they are on the hook for any HPC. Or perhaps you capture upside HPI and pay additional premiums for HPC protection. Guess this would be a put option on regional housing.

Why wouldn't this be possible? Would mortgage rates be lower because to some extent because your downside would be limited?

I remember reading a piece by Robert Shiller who argued that housing needed more finalization because it was impossible to express negative sentiment through going short (asides from non participation). The result was excess momentum to the upside and then crashes.

Would imagine you would need more comodification of the market to make this possible. Not my field of expertise but would imagine one way of doing this would be to create massive housing companies each owning regional housing stock. List them and then they would reflect prevailing market prices. If you (or insurance co. selling the product) thought London were crashing or you wanted to offload risk you could short London Plc. Surely this is conceptually possible. Strange that you can't insure the biggest most important purchase of your life.

I'd probably buy if I could hedge the downside.

Heck the government could regulate that all sub 10% deposits have HPC insurance. Would be more stable for the financial system.

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Why isn't horse racing gambling insurable.

is the heat affecting people?

Think about it - a proper market in housing derivatives. You could assess the probability of price falls in London without having to resort to foxtons share price.

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Maybe you should create a start-up company for it, to offer the insurance.

Rate everything AAA+, charge a tasty premium, and then default as soon as values tip a few percent... like CDOs into 2007.

We could have another trebling of house prices, and make sure the guy who says not a bad time to buy £450K rural house in Yorkshire is proven right.

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I'd probably buy if I could hedge the downside.

Nice avatar. Purest HPC.

Hedge the downside.

That's what renter-saver taxpayers have been for, as well as future generations, so much debt loaded onto Gov's national balance sheet.

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Why isn't this possible?

You buy a house, agree principal etc, arrange mortgage etc. and buy an insurance policy against a material decline in the value of your house over the mortgage term.

Insurance relies an the the individual insured risks being largely non correlated e.g. not everyone is going to crash their car on the same day, or fall ill at the same time, not all ships are going to sink at the same time etc. Insuring house values would be impossible as they all fall/rise together, unless you could find something that moved the other way to use as a hedge.

Edited by goldbug9999

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Insurance relies an the the individual insured risks being largely non correlated e.g. not everyone is going to crash their car on the same day, or fall ill at the same time, not all ships are going to sink at the same time etc. Insuring house values would be impossible as they all fall/rise together, unless you could find something that moved the other way to use as a hedge.

I don't think that's right. You are able to buy insurance on the stock market through derivatives.

Insurance is all about risk transference, distribution and compensation for bearing that risk.

Not everything needs to be hedged.

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The concept reminds me a little of AIG insuring the losses on derivatives. As the market exploded and boomed, banks got nervous, so they placed all that risk at the feet of AIG. AIG was quite happy to take on the additional risk, as from their perspective probably very few of these derivatives (ultimately mortgage backed securities) had gone bad. Of course when the SHTF it's not some slow movement, you have a huge number of policies requiring paying out at the same time and destroyed AIG.

As a previous chap pointed out, the issue would be the combination of a tsunami of claims. If you consider how much money is in housing, and then what an effect on a 20% could mean. Essentially unplayable.

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Maybe no one would take the opposing bet that house prices would go down?

Nor does the public value the risk of of house prices going down - compared to let's say, fire, theft, structural damage, flooding etc.

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Right, it wouldn't be worth while to set up the fund.

You'll just get lot's of disgruntled HPCers (which have bought a house?) phoning up at the end of the month saying, "but according to my calculations, the adjusted monthly figure is is -0.1% NOT +0.1%, pay me £5"

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Maybe you should create a start-up company for it, to offer the insurance.

Rate everything AAA+, charge a tasty premium, and then default as soon as values tip a few percent... like CDOs into 2007.

We could have another trebling of house prices, and make sure the guy who says not a bad time to buy £450K rural house in Yorkshire is proven right.

You know what, I'm really glad i've worked my way into your thinking so deeply. This must be the 5th thread I've opened where you've referenced me.

We don't need a trebling for me to be right. We simply need to avoid a 30% nominal fall over a short number of years. Which we will. :)

Edited by frozen_out

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