Go back to Using Financial Spread Betting as a Hedging Tool

UK House Prices Spread Betting

As far as I am currently aware you can only trade on the housing market within the UK. It doesn't matter where about you live, you just have to realise that the property values quoted are based on UK Property values. I am sure as international popularity of Financial Spread Betting grows further housing markets from around the globe will arise, along with additional products for us all to make money from.

So how do you make money from the UK Housing Market?

Well I feel a need to clarify a few points before we go into some details of the housing market and as ever it isn't difficult. I just want to make sure we are clear on a few things:

We are not buying any property.
We do not own or share any ownership in any property.
The contracts are identical to other Financial Spread Betting contracts.
There's no red tape, expenses or delays.
No Stamp Duty (UK Government Tax on property).
No Capital Gains Tax (UK Government Tax on windfall profits).
No need to put up the full value.

As you can see, once again we don't own anything, there are no liabilities or tax obligations, as there would be if we were actually buying and selling property to make profit. The only liability we have is that of our contract with the Financial Broker whom we have opened the trade with.

Financial Spread Betting on UK Property prices as we have seen lets you avoid many of the financial and tax implications often associated with investing in the property market. Financial Spread Betting on property prices may seem at first somewhat odd, but it lets you gain a great deal of exposure to a market without purchasing or obligating yourself to any property related contract.

The trade prices quoted on most house prices with Financial Bookmakers are usually based on the Standardised Average Price as reported by the HBOS from the UK lender Halifax, who issue their own survey called the Halifax House Price Survey. Therefore, the prices you are quoted are not inflated or guessing.

You therefore have an opportunity to profit from price movements within these markets, or indeed if you live within the UK, you can even 'Hedge' against your own property* so you can reduce possible losses in the value of your property by clever use of 'Hedge' betting.

*The value isn't based on your actual property value. You select the average property value based on the above average SAP (Standardised Average Price). Either your own UK county/District or that of another UK Country/District.

Trading on house prices can either be traded as price quoted based on the SAP average of the whole of the UK, or that of a selection of key regions within the UK. Not all regions are quoted by every Financial Broker. Please check with your Financial Broker before trading in UK Property Prices.

Both the national house prices and regional house prices are measured against the seasonally adjusted Standardised Average House Price which is published monthly, regional house prices tend be based on the SAP for regions which are published quarterly. You can find further information regarding the average house prices and the SAP prices by visiting the following URL: www.hbosplc.com.

The actual type of trade that you can open varies. It is best to check with your selected Financial Broker, prior to trading in this market.

Let's look at a trade to see how house price movements are reflected in Financial Spread Betting:

Let's say that the average HBOS figures out claim that the UK average house price is £140,500. The prices quoted by a Financial Broker are formatted as follows:

Average House Price: £140,500 = Quote 140.5.

This may be quoted as the following trade & spread 139.5/141.5.

We decide to trade LONG at 141.5 @ £100 per point. The value of property reaches £143,500 we therefore close at 143.5 resulting in a profit of £200.

We can of course trade SHORT if we believed that the National/Regional property prices will fall.

Points to note -:

Do keep in mind that the Halifax index is standardised which means that it is based on a limited section of the mortgage market (which may not exactly follow general house price trends).
In most markets in which spread betting companies operate, the risk can be laid off by the use of derivatives such as futures and options. But these do not exist in the housing market, so the company bears the risk itself.
In addition, while betting amounts can be very small - as low as a few pounds per point (equivalent to £1,000 of movement in the house price) - spreads tend to widen when larger bets are placed.
The maximum normal trade that IG allows is £250 a point for UK prices and £150 for London (while minimum bets at IG are £10 per point - which requires a margin of £150)
The lack of an underlying hedging mechanism for the spread betting company also leads to wider spreads.
An issue is that the prices quoted by IG Index already takes into account the views of those already buying and selling in the market so will reflect the current market situation - in a situation where house prices are falling there would typically be many more sellers than buyers which forces the price lower still and reduces its attractiveness as a hedging mechanism.
Spread betters typically have to put at least 10% of the value of a position so hedging a house against falling prices would require considerable capital.
IG Index has scaled back its range of contracts from 11 UK regions covered by the Halifax house price indices and the UK as a whole to just two - Greater London and the UK.
IG Index now offers prices just two quarters ahead, compared with four originally, so this type of spread bet is geared towards short-term investors. City Index, meanwhile, has stopped offering the product.
For UK property, spreads are quite tight: at the time of writing three basis points for the near quarter and 3.6 basis points on the far quarter. However, London house price contracts have wider spreads - five and six basis points for UK and London respectively.
Alternatives to betting directly on house prices include speculating on interest rates or the building section (correlated markets).

Spread betting providers typically find it difficult to hedge against clients' positions in property spread betting as there is no underlying exchange where they can offset their exposure. IG Index sets bid-offer spreads in such a way as to encourage two-way action. This does not necessarily mean those who place long bets believe house prices will recover. What this means is that if there is strong sentiment that property prices will remain under pressure, then the bid-offer spread will factor in a decline. To make a profit, spread betters have to predict accurately whether the fall in house prices will be more or less acute than that reflected in the spread. For instance, IG index's house prices for June are currently trading at 150.9-153.9. This implies an average house price of £150,900- £153,900, quite a big fall from the current average price of £163,966. Spreadbetters who expect prices to fall even further can short at 150.9. But prices would have to fall by £13,066 - or about 8 per cent before they even reach this sell price. So as you see to make money house prices would have to fall by this amount in the next 3 months. Spreadbetters who think price falls will not be as extreme as the IG spread suggests can 'buy' at £153,900. If, when the June figures are published by Halifax, the average house price is higher than this, the spread bet will pay out.

With property spread betting if you guess right, you win big. If you guess wrong, you can lose a whole lot. But unlike buying a house, there's no red tape, no stamp duty, no waiting around for solicitors, and all your gains are tax-free.

How to 'Hedge' and lock in the value of your own property?

One of the clever things with trading house prices, is that you can hedge against your own property and therefore protect some of the gains that your property has got over the years. Please note that this is just an example and anyone deciding to 'hedge' against their own property using this method is best first consulting a Financial Advisor, as there may be stipulations or laws depending on where you live that prohibit you from doing this.

As I update and write this article, property in the UK has risen to an incredible amount. We have people selling up and moving abroad, there are those that are releasing equity (getting a loan secured on the house basically - not a great move, but very popular) to fund extensions, conservatories, pools and more. It does amaze me that the general public as a whole are ignorant to the fact that overall the property market is cyclical. Therefore, to borrow against any available equity in the house because it has risen by 40% in two years is crazy. The loans tend to be over 5 - 10 years to pay back, or the house is re-mortgaged to release the same equity. Property values adjust every 3-5 years or so. Currently, the average cost of a starter home is over 5-6 times that of the average income. Mortgages that are now on offer are going beyond 25 years which was the norm, to 50 to an amazing 75 years in some cases.

Where does that leave the average man and woman on the street? Well property has always been a good investment over the long term. The best time really to buy property is after a 'bubble' similar to the one we are in bursts and settles. Personally, to buy a house now would be crazy and there are signs that the market is slowing. One tell tale sign is that the 'Buy to Let' mortgages which have become popular with those with high equity in their own houses, have re-mortgaged on their current property to buy another smaller property to Let out. This was a massive market and was growing tremendously, especially in the south of England. However, there are signs that this is slowing. Additionally, the markets tend to look at the south and London for signs in the housing market slowing down.

Now I am going to tell you something, which may at first seem very obvious, but in fact very few people actually think about. Your house is only worth what others are prepared to pay for it - NOT what it's valued at. Think about that for a moment. It's not the valuation of the house, it's what people are prepared to pay for your house. Obviously I know that may sound like a stupid thing to say, but bare with me.

In London the valuations of properties have remained pretty constant, growing by a percentage every month. Now however, I feel the market has, or is about to reach a pivotal point. Valuations may be high and all this sounds great, but because valuations are high and the market is tremendously overprice. For instance, at the time of writing a £150,000 house real value is around £115,000.

The fact that the market has exploded has created greed amongst those looking to capitalize on the equity within their houses. Meaning that there are more houses on the market now, than when there was previously before the boom. The more expensive the property, the smaller the number of people that can afford to pay for it, unless they have a similar property and are moving to another similar priced property. Few people can afford to add more to their current mortgages, as wages haven't increased to the same levels that property has. Remember, I said that the current cost of the average house is five times that of the average wage. Combine that, with the fact that the property and mortgage markets are desperate for first time buyers to join the property ladder. Yet, we come across the same problem in that first time buyers are currently being priced out of the market.

This is why I say 'your house is only worth what people will pay for it'. Considering all the above points. If the market is over populated with overpriced property, combined with buyers who are finding it difficult to fund higher mortgages; a correction in the current market, in terms of people offering lower amounts for properties that what they are valued at. There has been signs of this in certain parts of central London on the higher value properties, it's not foolish to assume that this same correction will begin like a domino effect through out the market in general.

Now I hope that I have made you think? Also, I hope that this has made you keen to know of a possible way of locking in the current value 'hedging' - on your own property.

Here's how to lock in the current value - 'hedge' on your own property

For example; we will use a round figure for a value of a property, let's say, property X is worth £100,000 at this moment in time.

The overall equity in the house is say £50,000 and you were sure that the price of property was starting to slide. Tell tale signs are news items in the papers that point to doom and gloom and there has been a few of those lately.

Now all we have to do is to take a Short position on the value of property near or where the property resides. For example I live in a beautiful part of the country in the county of Shropshire. What I could do is to release that equity and using that equity place a short on the value of an average property either in the Midlands or in Shropshire whichever is nearest. Or, in fact there is nothing stopping you from going Short on a market that tends to be hit harder than your own and these tend to be reported as the ones that start the slide which are predominantly based in the south of England.

Essentially what you are doing is as follows:

Property X = £100,000

Equity = £50,000

Short opened as a hedge at = £50,000 (as an example)

The gearing on your Short means that as your property fell in value, the profitability of your trade goes up in value, minimising the amount of lost value in that property.

Of course it goes without saying that there is quite a bit more to it than that, but the basics of 'hedging' against your own property to protect its current value, I hope has excited you about the possibilities open to you within trading Financial Spreads.

Things to consider are the extra mortgage payments, fees etc. To release that initial equity in the first place. Chances are you wouldn't need to release all the equity in your home, to fund enough as a 'hedge' value. It also goes without saying that every ones circumstances are different and that a Financial Advisor should be consulted. However, be warned that these people are not open minded to risk, especially Spread Betting. You have been warned.