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How to play falling house prices
In theory it should be easy to spread bet on house prices, since you can bet on them rising or falling. But don’t be tempted, says Tim Bennett. There's a much better way to play falling house prices.
Are falling house prices good or bad news? The answer for most of us is good news.
First-time buyers stand some hope of getting on the ladder when prices fall. And for anyone looking to trade up, falling prices reduce the relative gap between the house you are selling and the one you want to buy. That means you need less of a deposit, or a lower mortgage.
So only buy-to-let landlords, other multiple property owners, and those trading down the ladder (eg retirees) like prices to rise. For the rest of us, falling prices are a benefit.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
So what about spread betters? Well, in theory it shouldn't matter either way since you can bet on prices rising or falling. But in practice, don't be tempted, even when you see quite big monthly price changes (drops most likely at the moment) being recorded. That's because making money is tough given the limited competition in this market.
A few brokers (such as IG Index) offer spread bets on property prices. Here's how they work. Let's say you are bearish about where UK prices will be nationally next spring. You could place a downbet on the Halifax March 2013 index via IG Index (you could choose to bet on the September 2012 or December 2012 index too).
Let's say the spread quoted is 158.6-161.1. The minimum bet size is £10 per point (a £1,000 move in the index). So you could place a downbet at 158.6. Then you wait.
The longest period you can run this bet for is until next March, when the index is published. However you could cash in earlier if expectations change about where the index will be and the spread moves accordingly.
Let's say you've bet at £100 per point and the index moves by 15 points, or £15,000. In theory you could make £1,500 tax-free.
So why is this unlikely?
The problem is you need the index to move further than it's likely to in order to recover the spread. The gap between 161.1 and 158.6 is 2.5. That's around 1.5% of the price quoted. Since 1975, the biggest quarterly falls have been around 1%, so you need two pretty bearish quarters to really make any money here.
The truth is therefore, that although this market looks tempting, it's actually pretty illiquid and prices are 'sticky'. So what are the alternatives?
Well a true kamikaze investor might sell their house, wait for a price drop and buy it back cheaper. But it doesn't take a rocket scientist to see the pitfalls of this route cost being a big one (transaction costs and stamp duty on the repurchase price).
A better bet is to place a downbet on construction firms, housing material suppliers (e.g. tiling firms), carpet firms and/or the wider sector itself.
Once again, though, check the bid-to-offer spread as this can eat into any profit you make. Also note that market expectations are already 'in the price', so ask yourself: "what do I know that everyone else doesn't?"
And when betting on shares, always use a stop loss to limit the damage should a bet backfire.
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Tim Bennett looks at some of the most popular house price surveys and explains the differences between them, how they work, and how useful they are as a guide to house prices.
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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
