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How to Bet on Falling House Prices

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According to the press the US housing market is in freefall and the UK housing market is following it. A market that only moves in one direction clearly offers investors opportunities. But how to trade house prices? One of the easiest ways to gain exposure is through spread betting where some companies now let you speculate on the average UK house price and even the average London house price.

Economies thrive on confidence and one of the pillars of confidence in the UK is the value of property. If the whole market grinds to a halt through lack of liquidity then there would be only one direction for it to go. Down. In a market bereft of buyers the prices must fall. With fewer and fewer people able to "gear up" to pay the current prices then I fear this will be the scenario towards which we are heading. A major problem is that once a trend gets set it is very difficult to halt its momentum (witness the property situation in the US). Buyers shrink from putting themselves in hock when they fear that next week / month / year the house they have, so painfully paid for, will have dropped in value. And so stagnation follows. If the housing market locks up then many retailers who thrive on sales to the new owners' will also fail and so on down a long line that ends with recession. At the moment, growth is just enough to keep the tills turning over but without some aid from our central bank I fear that this will not be the case for long.

If I was looking to buy a house now I would just knock 25% off the asking price on the basis that this is where forecasters expect the market to be in a years time. Presumably I would be paying a Mortgage (probably around 7.5%) during that time, have paid 2 to 5% stamp duty on the deal plus numerous other house purchase related fees. If the market did indeed drop as expected a purchaser at current levels could easily be looking at an overall negative cash/asset position of some 30-35% by next year once you include all of the costs. That does not sound too good.

Although for those people who are certain that the markets are in freefall, or for those who feel the UK is different to the US and less affected by sub prime fallout, the spread betting companies have come up with an interesting type of speculation.

You can now spread bet on the future UK average house prices.

How does it work?

Looking at IG Index they make their spreads based on the Halifax House Price Survey produced by HBOS, the premier and most widely publicised indicator of the UK housing market. So, whether you want to profit from predicted market shifts or hedge against the value of property you already own, you can back your judgement against nationally recognised figures.

Prices are given in points per 1,000. You simply 'buy' if you think the average price is set to rise or 'sell' if you think it will fall.

The current spread of the Average London House Price (December) market is 258.1 to 264.1 points. The current spread of the Average UK House Price (December) market is 163.1 to 166.7 points.

(Both December markets expire on 31 December).

So focussing on London, that spread is basically saying you can bet on London house prices being higher than 264,100 or lower than 258,100 on 31 December.

You bet in x per point. Where a point is 1,000 of the house price. So if you are trading 15 per point and the average house price moves 5,000 (5 points) your profit / loss would change by 15 per point x 5 points = 75.

Taking the above London spread let's say you think the prices will continue to fall. You could therefore Sell 20 per point at 258.1 points.

If the market does fall to let's say 249.5 points (ie 249,500) then you would win / lose: (258.1 points - 249.5 points) x 20 per point = 172 profit.

Note that profits in spread betting are tax free*.

But if the UK market has a correction or simply stops falling or if London is more resilient to the current mortgage malaise then the average London house price could be 265,200 on 31 December.

Therefore if the market closes at, let's say, 265.2 points then you would win / lose: (258.1 points - 265.2 points) x 20 per point = -142 loss.

Of course, as the example above shows, as with all spread betting, care is needed. Financial spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice. * Note that Tax Law may be different if you pay tax in a jurisdiction outside the UK, it can also change.


About the Author

Daniel Jones is an experienced financial trader and respected commentator on the CFDs and spread betting futures markets.


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Article Published/Sorted/Amended on Scopulus 2008-09-02 22:28:22 in Business Articles

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