AbstractThe recent real estate bubble was fuelled by non‐risk‐adjusted lending policies, low interest rates, and complex finance vehicles. Mortgage‐backed securities (MBS) played a crucial role in the crisis. These vehicles were praised as liquid capital market instruments that allowed mortgage lenders to replenish their funds, which could then be used for additional origination activities. However, in some forms, securitized mortgage pools are highly complex and hard to price. It turned out that MBS were not able to deal with the risks of the real estate market appropriately. The painful burst of the real estate bubble highlights the urgent need for instru‐ments that provide more transparency and allow better mitigating of both house price and commercial property risk. Property derivatives, currently emerging in the US and the UK, address real estate prices directly and make them more transparent. Thus, they facilitate a more efficient risk allocation. We illustrate the possibilities and limitations of property derivatives with respect to the current subprime crisis. Copyright © 2009 Wilmott Magazine Ltd