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Oxford Review of Economic Policy 2008 24(1):176-179; doi:10.1093/oxrep/grn007
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© The Authors 2008. Published by Oxford University Press. For permissions please e-mail: journals.permissions@oxfordjournals.org

This article appears in the following Oxford Review of Economic Policy issue: HOUSING MARKETS AND THE ECONOMY [View the issue table of contents]

Discussion of ‘Financial innovation and European housing and mortgage markets’, by David Miles and Vladimir Pillonca

Patrick Honohan*
* Trinity College Dublin, e-mail: phonohan{at}tcd.ie


  Abstract

Although their paper stresses the potential merits of a particular financial innovation—a form of shared-ownership indexed contract—Miles and Pillonca surprisingly neglect the role of differential surges of financial innovation in explaining cross-country differences in house-price inflation. The risk-reducing potential of their favoured instrument deserves further analysis, not least because of the sizeable political risk involved: the experience of several other countries that have used indexed mortgage contracts shows their limited robustness to macroeconomic shocks.

Key Words: housing finance • indexation

1 This is a pity, of course, but it could possibly be addressed by adopting some form of error-correction model, in that the formula used by MP is based on equating the change in housing supply and demand, rather than their levels.

2 To be sure, a and b are likely to be negatively correlated, and this would reduce the range of expectations estimates.

3 In this they echo the views of Shiller (2002).


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