Playing the next phase of the property market

published 12 October 2010

What an extraordinary September for the UK housing market. According to the Halifax, house prices were off 3.6%! The Halifaxindex has been running for over 25 years, and never before -not even during the financial crisis -have we seen anything like this.

So the big question: Is this the start of a rout, or a one-off shock? Today I want to explain where I think house prices are going in the months ahead. I want to allay any fears that this will turn into a rout. I reckon prices will peter out into a more steady correction from here.

If you followed my advice to put a down-bet on the house price index in May, you are already sitting on some profits. Today I'll explain what you should do from here.

Subscribe to MoneyWeek

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

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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

Ignore the hysteria over housing

There will be a lot of noise over the Halifax figure in the weeks ahead. Many will see the 3.6% drop as a signal that house prices are set for another sickening lurch downwards. But they're missing something. You see, the Halifax figure is based on the mortgages they approved during September. That's based on the surveyor's valuation.

Discover how to profit from oil without ever owning a single barrel
Why NOW is the best time to put a few carefully selected oil investments into your portfolio

But the price agreed between the buyer and seller is normally reached quite a while before this. So there's a time lag in the data. The prices were probably decided some time in July and August.

Now, if you cast your mind back to summer, you may remember some nervous economic moments. George Osborne delivered his emergency budget at the end of June, and talk of a double-dip recession ensued. European sovereign debt issues had resurfaced and the markets were fretting over European bank stress tests.

Just look at the FTSE 100 over the period.

Source: Digital Look

The FTSE is not a proxy for homebuyer sentiment, but it's not a bad barometer. After all, it's the most quoted financial figure in the media and it's bound to play on people's minds as they make what is likely to be the biggest investment decision of their lives.

So will housing recover along with the FTSE?

The chart shows a degree of recovery in the financial markets during September. And that's certainly going to help keep housing from a precipitous fall. But this isn't enough to drag the market out of what I think will be long term stagnation.

A rising market needs confidence. But for housing, confidence is well and truly shaken. The financial crisis showed that house prices can go down as well as up. And after a bit of agitation during the summer, sellers with realistic expectations have come to the market.

So what should you do now?

Stay in on my housing trade till March

Towards the end of May, knowing that financial markets were jittery, I wrote to you with the idea of putting a down-bet on the market:

"IG index ( the spread betting company ), offers bets on the quarterly index published by Halifax... right now, the spreadbet for the end of March 2011 is £163.8 (to sell)...

"I reckon that prices will soon resume their down-trend"

This is how I said you should take advantage:

"So, if you sell the March 2011 quote at £163.8 at £10 per point and house prices fall say 8%, then the bet will close out at £155 and you'll pocket 8.8 points (163.8-155 = 8.8) times your stake."

And guess what? On Friday (8 October 2010) the forward price for March is £155, the very figure in my example. So if you placed your bet, you'll be sitting on a paper profit of 8.8 points times your stake.

Given the marginal uplift in the financial markets, I reckon the price is about right. I wouldn't be inclined to put a down-bet on now. But if you're sitting on an open position, I'd stay with it until it closes in March.

That's because the spread on house price bets is quite wide, so you may as well wait until the bet closes out at the mid-price. That way, if there's any further deterioration in the market, you'll profit and if prices drift to the expected £155, you can pick your winnings up then.

This article was first published on Friday 8 October in the free investment email The Right side. Sign up to TheRightSide here.

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do

Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.