I received a press release this week that told me that one in three Brits regularly look in the windows of estate agents to check the market. The only amazing thing about this is that the number isn’t higher. Perhaps it’s because everyone else is checking the value of their house on Zoopla.
Last weekend was more fun for homeowners than it has been for some time. The Nationwide numbers tell us that on average UK house prices have now risen every month for 12 months in a row. Overall prices were up 8.8% last year.
And it was a happy weekend for anyone thinking of swapping London for Hampshire (now’s the time to make the trade) or for anyone who just wants to do the sums and take their hypothetical profits on an outing to Selfridges after brunch.
But what if you don’t own a house, or if you think you don’t own quite enough house? How can you get more exposure to the market? Newish financial firm Castle Trust has a deal for you: the ‘Housa’.
This is a financial instrument you can buy from them (and put in an Isa) that tracks the price of the average UK house as measured by the Halifax index. There is a capital growth Housa or an income Housa.
The former promises that you will “always outperform the Halifax index” whether it rises or falls. There are three-, five- and ten-year deals; let’s take the three-year one.
If the index rises, you get 125% of the rise on redemption. If it falls, you only get hit with 75% of the loss. Over ten years, that goes to 170% and 30%. Go for the income option and your investment matches the return on the index, but you get a set return as well – 2% over three years rising to 3% over ten years.
Now, this doesn’t sound bad, and several regular readers have asked me about it. They’re a cynical and suspicious lot, as is only right and proper when dealing with the financial services industry, so mostly they just want to know what’s wrong with it.
The first answer is that this is a structured product. Ask people in the UK why they buy houses above everything else and the answer isn’t usually because they know the Bank of England and the government will do everything possible to stop them losing any money, ever. It is because they trust bricks and mortar. They know where they are with it. Things are “safe as houses”.
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This isn’t remotely true, of course. But I can see why people think it is. With a Housa, you aren’t buying a house – best regarded as a large physical lump that will pay you a yield if you let someone else live in it – you are buying something else altogether.
Castle Trust refers to Housas as trackers. But they aren’t trackers in the same way as a FTSE 100 tracker is. A FTSE 100 tracker buys little bits of a representative group of the companies in the index, and so more or less replicates the return of that index. But you can’t own a small part of every single house that makes up the average the Halifax calculates. So to replicate the index, Castle Trust does something else: ‘partnership mortgages’.
Broadly speaking, Housas provide the capital for the mortgages, and the mortgages provide the returns for the Housa investors. Castle Trust offers homeowners the ability to borrow 20% of the current value of their home. The borrower pays no interest, but on redemption hands over 40% of any capital gain to Castle.
Effectively, you’re selling Castle a warrant on the value of your house. Say your house is worth £1m today. You borrow £200,000 (on top of your regular mortgage, as this is a second charge deal). Ten years later you sell the house for £1.3m.
Castle gets £320,000 – the original £200,000 plus £120,000, which is 40% of the £300,000 capital uplift. If it falls in value, by, say, £100,000, Castle will take 20% of the loss and you get to cover the rest. Much of the upside is theirs. More of the downside is yours. You can argue about whether Castle is getting its warrants too cheaply. But at least if it is, some of the returns are heading for the Housas.
This could all work. But it isn’t simple. There’s a duration mismatch: mortgages are a long-term asset, while Housas are short term, and could be very short term, since you can redeem when you like if you accept a lower return.
Castle Trust should be holding enough liquid assets to cover redemptions, but if everyone wants to cash in their Housas at once and no one wants to pay back their mortgages, it might not be pretty. Know where you are with all that? Of course, you don’t.
Also, holding a proxy for property means you aren’t getting the yield you would from the real thing. Property investors always tell me it doesn’t matter if prices fall, because they’re in it for the income. That’s not the case with the growth Housa.
And while you get some annual return on the income one, it is well below market rental yields in most parts of the country.
So back to the beginning. What’s the catch? If you understand that these are unguaranteed structured products backed by a new and unproven mortgage business which is working off second charges which offers you a return linked to one of many indices that only tenuously reflect the values of individual houses – nothing really.
• This article was first published in the Financial Times.