I have 3 Buy To Let properties in London - and am getting concerned that prices could fall at some point in the future. Because I really want to hold my properties for the long term (10 to 20 years at least), and because of the capital gains & other costs - I really don't want to sell. Thus, an alternative way of hedging my bets seems attractive.
I'm looking at the prices at the close of March '05 in London. Let's say my properties are worth £500k - if the market has fallen 10% - the values of my properties will be £450k - that's a £50k book value loss.
So - if were to sell the Mar '05 market @ 257.6 (this price assumes a 9% rise) at £1,000 a point (approx 50% hedge) - I would make £54.7k as the market would close at 202.9 (rise is calculated from the current Mar '03 price 238.7).
So - so far so good.
This seems like a worthwhile hedge to me? The only real issue in my mind is that when the market rises you don't actually get the money into your hand - so to pay your Spread Betting Loss you would have to re-mortgage or use savings or even sell a property (not desirable in my case). You could get more squeezed in the event of a bigger rise (eg 25% rise = £40k loss) - but in this case, I'd have gained £125k on my properties.
Two things...
1.) You can make money with spread betting. Decide if that is something you want to do.
2.) Hedging is a tool to deal with being caught out when prices move against you. If you are intending to hold for 10-20 years why do you need a short-term hedge? The tool (the spread bet) cannot deliver a solution to the long term exposure. Hence the hedge is not effective.
Think of it this way for a minute.
Stock prices go up and down daily. Lets decide that we want to hold for 5 years. Hence we are concerned about the performance over the total 5 years. If prices go down on a Monday, up on a Tuesday, down on a Wednesday do you really care? Ignore margin calls, etc. The daily movement is not important when you honestly expect to hold for 5 years. If there is very little chance that you will decide to sell before the end of the period then the risks on a daily basis are not important.
Hedges are not free. If you buy a hedge you pay a price. If the hedge is protecting you from a risk that you do not have you have wasted the money.
If you want to 'play' the market in the short term, spread betting might be a very good tool. If you are really concerned about the risks over 10-20 years focus on location and keeping good tenants. The risks over that period are not impacted greatly by short term movements (the 'crash' that many are expecting for example).
The only effective hedge against property price swings is, in my opinion, at the time of purchase and shortly after. It is always possible to buy below current market prices - it takes a lot of legwork but the properties at the right price are definately there. Secondly, buying a shabby property at below the market value of a top notcher, then improving its value forms another price hedge.
As a long term investor, fluctuations aren't a matter of concern. My oldest property was bought in 1972 and has seen off two major crashes and is showing a capital gain of 33 times purchase price (yeah, it was a shack in what was a cruddy area at the time and I got lucky. The area in question was Primrose Hill - my personal lottery win!!)
When it comes to long term investment there are two things to take into consideration - population is increasing, whether by birthrate or immigration makes not a whit of difference and land is a static commodity. As has been quoted before on this board, Mark Twain said "Buy land, they're not making it anymore"
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