For a while now I've been reading analysis and thinking about UK property prices, on the basis of which I decided it might be a good idea to limit my exposure to the property market as we enter a period where it may begin to fall. I realize that this is quite an emotive topic but that is the decision *I* have made, I don't expect everyone to agree!
Given my outlook I had a look into hedging against the value of my flat as an alternative to selling up and renting, which of course is expensive in itself, disruptive, time consuming, etc. The only appropriate financial mechanism that I have found to date is spread betting on the Halifax Property Price Index via IG Index, however upon analysis this doesn't seem to be a very effective way of achieving a mid to long term hedge.
The problem is that the spread bets are only over the duration of a quarter, after which you must close the bet and re-enter at the new bid/offer prices. There may be an option to rollover the bet but from reading the IG index literature I think that still requires the closure and re-opening of the position - with the possible benefit of a 40% reduction in the re-entry spread.
Looking at the house price data since 1975 I see that even the largest quarterly falls were only in the region of 1%, thus any price movement within a quarter will be taken up by the spread! If you then consider that the bid/offer prices are reset each quarter and therefore take into account the general market direction this (IMHO) makes spread betting in this particular instance a poor way of hedging against property value.
Given all this I wondered if you know of an alternative way (or spread betting company) of easily hedging against property value. Or if you disagree with my comments then I'd be interested in discussing the matter further.
Thanks,
Peter Green.
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I reached the same conclusion - I can't understand why they don't offer products with longer durations. But I guess with the quarterly spreads as they stand they don't actually have to put much effort into covering their customers positions because the positions just aren't going to move that much. Therefore it was/is a quick and easy way of providing a property index spread bet - which the completion doesn't offer AFAIK.
The only other option is a CFD on a mortgage bank such as Bradford & Bingley or Alliance & Leicester or even construction companies. You can also hedge against falling property prices by overpaying your mortgage as much as you can. That way you reduce the chances of yourself ending in negative equity.
If you have this flat as somewhere to live, then the actual value is totally irrelevant until you come to sell. When you do come to sell, you will probably want to buy another property. If this is the case then changes in prices will largely cancel out, in fact, if you are buying a bigger property a fall in price will help you.
a) Current property worth 100k, want to by property worth 150k, need 50k more.
b) Property prices drop 50%, current property worth 50k, want to buy property worth 75k, need 25k more.
In case b) you will also pay less in estate agent's fees and stamp duty.
If you bought your flat as an investment, then hedging against loss will also reduce your gain should prices rise. Unless you are very lucky/clever you will end up loosing a small amount which ever way prices move. Of course, that may be preferable to the risk of loosing a large amount.
Ok, you may want to re-mortgage in which case the value would be relevant.
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