How you could profit from falling house prices

published 24 April 2007

A new scheme for investors to get into the property market has just been launched. Steer clear and bet on a fall instead.

"Becoming a landlord has got a lot easier," enthuses The Sunday Times. With the launch of the Property Investment Market (PIM), people can buy shares in residential properties for as little as £1. The scheme targets "the tens of thousands of Britons who cannot afford to buy their first or second home but still want to invest in the multibillion-pound housing market", says the paper. And clearly PIM is confident about the future as it has apparently bought 30 homes and "signed up a few thousand investors who own shares tied to each individual property", says The Times.

One of the main allures of PIM is the notion that it is more liquid than the actual property market in other words, you can buy and sell your property, even if it is only a chunk of it, with the same ease as buying and selling stocks. But that relies on there being enough willing buyers and sellers to make a market something investors cannot take for granted, particularly in a new market like this. "You can sell your shares at any time, but if there are no buyers and you need to exit quickly, you may have to take a loss," warns The Sunday Times.

A glance at the PIM website (www.opromark.com) raises other questions. When we looked at what was on offer, there were just five properties and one buy-to-let block' in which you could actively trade'. Several other properties are in the fund-raising stages, but unless enough individuals invest enough money to buy the properties in question, they'll never get beyond that. And of the available properties, only three actually have tenants. The other properties still haven't been let out and that includes the block of buy-to-let flats, all of which are vacant.

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These issues may explain why the company has struggled in the past. Stephen Kenny, the chief executive, admits that PIM is actually a rebranding of Opromark, a residential property market that first launched in June 2005 to similar press hype. How many homes did Opromark eventually offer for trading? "One-and-a-half," Kenny told the FT, "one in Liverpool and the half in the south somewhere I'm just trying to recall. I know that doesn't sound great Oh, it's in Newcastle."

It's clear that what may have seemed like a sure thing on paper is having a tough time in real life which brings us to the other big problem: the timing. After more than a decade of extraordinary growth, property price rises are now slowing. Between January and February, the average price actually slipped from £205,399 to £205,102, according to Government data. Meanwhile, the latest record-breaking UK inflation figures virtually ensure an interest-rate hike next month, meaning further headwinds for the property market. In fact, it might be more profitable to short the shares of property sold on PIM. Unfortunately, this isn't possible. But for those who remain unconvinced about the rosy future of the UK property market, there are ways to profit if prices go down.

After successfully short-selling shares in building materials supplier Wolseley to profit from the US property slump, Investors Chronicle's Mr Bearbull has found a couple of opportunities to profit should similar problems arise in here. Mortgage specialist Paragon lends mainly to buy-to-let landlords. While its bosses claim its customers are "sophisticated borrowers who could not possibly get sucked into the vortex of a market mania", Mr Bearbull argues that "an essential characteristic of all price bubbles and let's acknowledge that there is a bubble in UK house prices is that even rational players get drawn in". And no landlord can "escape the pincer movement of rising interest rates and stagnant, or falling, house prices". The Bank of Ireland is another short-selling play, owing to its exposure to the Irish property market. "If the UK housing market is barmy the Irish market is daft as a brush," says Mr Bearbull.

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.