How to profit from falling property prices

The most obvious way to take advantage of imminent house price falls is to sell-to-rent and buy back in when the market has bottomed out. That doesn't appeal to you? Then maybe one of these less extreme strategies will...

After a strong start to the year, the UK property market now looks in real danger of stalling and going into reverse. Just last week the Royal Institution of Chartered Surveyors (RICS) reported that prices are falling at their fastest pace in two years.

The most obvious way to take advantage of this is to sell your home, lock in any profits you have made and rent elsewhere, aiming to buy when prices have bottomed out.

Good rental property is plentiful, thanks to the army of buy-to-let landlords that has sprung up over the last decade. And according to, it is now also far cheaper to rent than own in many parts of Britain.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But the time, hassle and expense of selling up, moving home, and then buying back into the market, mean this is only a realistic option for those who were planning to move anyway. And of course, it's risky anyone who sold to rent in 2004 may yet see house prices fall back to those levels, but it's probably been a stressful few years in the meantime. So what are the less extreme options?

Short-sell UK banks and house builders

A growing number of derivative products allow you to profit from the falling share prices of companies linked to the residential property market. Mortgage lenders are an obvious target, with a squeeze on profits likely as lending conditions tighten and indebted consumers become more reluctant to borrow.

Based on figures from Data Explorers Ltd, James Clunie at Scottish Widows confirms that mortgage banks Bradford & Bingley (BB) and Alliance & Leicester (AL) are attracting significant "short-selling" interest from City traders, who sell borrowed shares, aiming to profit by buying them back more cheaply later on before returning them.

Then there are housing firms themselves, such as The Berkeley Group (BKG) and Persimmon (PSN), who will all see lower profits going forward, particularly if the UK housing market follows the US.

Lastly, there's the retail sector. These stocks are likely to suffer alongside UK house prices because UK consumer spending has been propped up to a great extent by equity released from rising house prices. Home furnishing firms, such as Carpetright (CPR), look particularly vulnerable.

You can easily place a down bet on any of these shares via spread bets or contracts for difference. Just remember to cap your potential losses by always putting on a stop-loss if you do take out such a bet (for more on spreadbetting, see How to make big profits from small stakes).

Some of these shares have already seen significant selling since the summer. For example, as a group, UK house builders are down by around 30%. So you might wonder how much further they can fall. But look across the Atlantic to the US and you find that similar firms have seen around 75% wiped off their share prices.

If, like us, you believe that the UK housing market's troubles are just beginning and that inflationary pressures are unlikely to allow the Bank of England to help by slashing interest rates as quickly as everyone would like, then there's still plenty of mileage in shorting these stocks, even at today's lower prices.

Shorting an index

If spreadbets and contracts for difference sound too risky, you might want to investigate the London-listed SG "UK Property Index Reverse Accelerator", a structured product launched in June. You buy certificates at, say, £1,250, paying no stamp duty.

Any fall in the FT EPRA UK Property Index (representing the biggest UK-listed property-related firms), is multiplied by three and reflected in a rising certificate price, up to a maximum of £2,000 (a 60% profit, based on buying at £1,250).

On the downside, should the index rise by 55% or more, you lose 1% of your investment for every 1% increase above that level; but this is limited, in a worst case, to the sum initially invested.

What is a binary bet?

A binary bet is very similar to the fixed odd' style of wager familiar to anyone who bets on the horses. That's because you either win or lose a fixed amount, agreed when the bet is placed, depending on whether your wager eventually comes good or not.

Suppose you are bullish on the FTSE 100 and you believe it will end the day higher than its opening level of 6,700 points. The quote for a binary bet might be 25 points in effect, this means the broker thinks your outcome for the FTSE 100 is only 25% likely; or the odds are roughly one in four. So you buy at 25, having decided to bet, say, £5 per point. As long as the index finishes the day anywhere higher than 6,700 points you win a fixed amount calculated as 100 minus the quote times your stake. So 100-25 is 75, and 75 x £5 is £375.

However, should the FTSE 100 close below 6,700 points, you pay the quote times your stake, or 25 x £5 = £125. The beauty of this style of bet is that you can only lose a fixed amount. Of course, equally, your win is capped at £375, no matter how far the index climbs above 6,700.

There are several binary bet variations, of which the most common is the "one touch". Here you bet that the index will hit a specified level ("up 20 points") at any time during the day, not just when the market closes. You can also binary bet on other markets, such as commodities and foreign currencies.

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.