Daniel Jones asked:


 

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 ‘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.

 



Caffeinated Content

The Global Property Guide asked:


 

Weighed down by the credit crunch and high inflation, the global house price boom has ended, according to the latest Global Property Guide survey of house price indicators.

 

Only 13 countries in which dwelling price indices are regularly published saw prices rise during the year to end Q1 2008, while 21 countries saw dwelling prices fall in real terms, i.e., after adjusting for inflation.

 

In most countries where house prices are not falling, they are clearly losing momentum.

 

The biggest house price fall was in Latvia (Riga), down -38.2% by May 2008 from a year earlier, after adjusting for inflation.

 

US prices also fell during the year to end of Q1, by anything from -4.2% to

-18.1%, after inflation, depending on which index is used.

 

In Europe, significant real house price falls took place during the year to end-Q1 2008 in Ireland (- 13.2%), Luxembourg (-5.8%), Portugal (-4.3%) and Malta (-4.9%).

 

UK house prices were only slightly down at end-Q1 from a year earlier, the house price crash having begun in earnest in early 2008. House prices fell during the first quarter by between – 0.7% to -2.1% (inflation-adjusted), depending on the index used.

 

In Japan, the housing market is now losing momentum once again. The urban land price index for 6 major cities was up only 4.1% year-on-year (y-o-y) to H1 2008 in nominal terms (2.9% after inflation), down from 7.8% over the same period in 2007 (7.9% after inflation). The national index for Japan fell by 0.7% y-o-y to H1 2008 (-1.9% after inflation).

 

Inflation woes

In nominal terms, 28 countries saw their housing prices rise during the year to end-Q1 2008, while only 6 saw prices fall.

 

However when property prices are adjusted for inflation, the picture looks entirely different. Skyrocketing oil, food and commodity prices have pushed inflation up around the world.

 

In Ukraine for instance, nominal house price growth was sharply down from 79.5% in the year to Q1 2007, to 18.2% in the year to Q1 2008. But when adjusted for inflation, property prices actually fell by -6.4% y-o-y.

 

In real terms, property prices fell y-o-y to end-Q1 2008 in Norway, Spain, Greece, South Korea, New Zealand, Indonesia, South Africa, Israel, Estonia and Lithuania, despite nominal price rises in all these countries.

 

House-price booms elsewhere

On the other hand, strong house prices increases were observed in a handful of emerging economies. Ahead of the pack was China (Shanghai), with an enormous 40.5% nominal house price surge during the year to the end of Q1 2008.

 

Other countries with impressive nominal house price increases y-o-y to end-Q1 2008 were Bulgaria (31.6% y-o-y), Hong Kong (31.1% y-o-y), and Singapore (29.8% y-o-y). Strong house price gains also took place in Cyprus, Australia and Taiwan.

 

Again, when adjusted for inflation, many of these price rises look much less impressive. The world’s top-performing housing market (after inflation) was not China or Hong Kong or Singapore, but Slovakia, where real house prices rose by 29.3%.

 

 

Causes of the downturn

There were arguably three main factors behind the end of the housing boom:

 

· After a very long boom, house prices had become stretched in many countries. The main indicator of this is the price/rent ratio, which compares the relationship between the buying price of a dwelling, with its rental price.

 

As the boom progressed, buying prices become high (in relation to rents and financing costs) in many countries, leading to decisions by some buyers to rent instead of buying. Mortgage-holders also came under extreme pressure as interest rates rose. A key lesson is the critical importance of monitoring price/rent ratios, to ensure that house prices valuations stay within reasonable limits. (Declaration of interest: The Global Property Guide produces comprehensive price/rent ratio estimates, globally).

 

· Inflationary pressures forced central banks to raise interest rates. This particularly impacted European countries where mortgage loans were primarily made on variable interest rate terms. Countries with heavily indebted households are also vulnerable when interest rates increase.

 

In developing countries, the overall economy (which strongly sways the mood of the housing market) is sometimes very sensitive to interest rate changes or to direct intervention by the monetary authorities. In some countries, mere threats of interest rate hikes are enough to shake the stock market and scare away foreign investors. But conversely, developing countries typically have smaller mortgage markets, reducing the impact on housing markets.

 

· Unsound regulatory and banking practices in the US and elsewhere led to over-lending by mortgage providers which, when these unsound loans began to go bad, caused a financial crisis. The bad news spread both by a panic contagion effect, and because many banks outside the US turned out to be more exposed than initially expected.

 



Prospects

Inflation remains an extremely challenging problem for the world’s central banks. In addition, the financial shocks to the world’s banking systems resulting from house price falls remain to be worked through (historically, most banking system collapses around the world have been caused by falling house prices).

 

Until these financial systems feel more confident that their problems are behind them, loan volumes are likely to fall. Therefore, it seems likely that the world’s house price momentum will continue to go down.

 

 

 

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