Why you should avoid property spread bets

Spread betting might sound like a good idea if you want to make money from the property market without buying and selling houses. But for most retail investors, it isn't, says Tim Bennett.

"Spread betting on property price indices is a viable lower-capital alternative to speculating on the property market," says investment resource site independentinvestor.co.uk. "Traders can now profit from house-price fluctuations as if it were any other market".

For a few professional traders, perhaps that's true. But for most retail investors, property spread betting is just not a good idea.

Speculating on property prices by buying and selling houses is an expensive, slow process. There are all the fees to consider (to surveyors and estate agents and the like), plusthe taxes, which include stamp duty (at up to 5% of the purchase price) and capital gains tax on any profit. Then there's the time it takes property can be an illiquid asset, as many a wannabe seller will confirm.

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Enter property spread bets.

In theory, these take away all of the headaches above and replace them with one simple monetary bet on whether average prices - as captured by an index - will rise or fall. No fees, beyond the bid-to-offer spread, and no tax either. Plus, spread bets can usually be opened and closed fairly quickly.

So, through a broker, you could place a 'downbet' on the direction of UK prices as measured by the Halifax index. A typical bet wins or loses an agreed fixed amount per one-point change in the index here, a £1,000 move in the value of an average UK home.

So if, having placed a down bet, average prices move by £15,000, you win fifteen times your stake. If you bet £100, that's £1,500 tax-free - and without having had to get involved in a property transaction. What's not to like?

The main problem is the bid-to-offer spread on this type of bet. Let's say you are quoted a spread on the result of the June house price survey (the Halifax releases data every quarter) of 158.3-160.5 (indicative figures from IGindex).

You decide to place a downbet as you think prices will have fallen below this level by then. The bid to offer spread is 2.2 points wide (160.5-158.3): that's over 1% of the average value implied by the price quoted.

Your problem is that since 1975 the biggest quarterly falls have been around 1% so you need quite a steep drop between now and the contract expiry to make any money. And because the pace of change in prices could be pretty glacial in today's slow market you'll need to bet quite a bit per point to make a half decent return - even assuming you can recover the spread.

So, while spread betting can be a useful tool in many markets, I am not yet convinced property is one of them.

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.