First here's a link to a report on house prices and spending which you will probably find useful.
Is anyone else placing bets on house prices? Six months or so ago I placed bets with IG Index on house prices to fall, shortly after I did this they stopped taking bets on prices falling since apparantly everyone was betting that they would fall.
It is interesting that they are taking bets again and the index is quite active. I made money on the March 2005 expiries but losing on the future dates. Their odds are suggesting prices in most areas over the next six months will be unchanged.
However, the IG prices are based on the Halifax numbers which are "adjusted" regularly to indicate property price trends - and I'm quite wary of this since if you look at their historic figures they never showed a serious decline in prices, even during the crash of the 90s. The main Halifax index which the IG bets are based on is in nominal terms.
In general spread bets differ from book making in that spread bets are a derivative. i.e. their price is derived from some underlying instrument.
Thus the underlying instrument for ftse cash bets is fair-value ftse. They offset their risk by taking offsetting positions in ftse futures.
Similarly the underlying for the IG HPI bet is the fair value Halifax index. However, there are no such thing as halifax HPI futures and so they cannot offset their risk. This was why they had to close the book when it became unbalanced.
One would assume that they move the price to attract equal numbers of bets on each side of the spread, but if this were completely the case, the book would never become unbalanced and they would not have needed to close it previously.
Having spoken to a guy at IG Index, I can confirm that daily price moves suggest some price-move demand-supply balancing is occuring (since they are a market maker).
However, when I put it to him that a "free-market" price would never have led to an unbalanced book, he gave me some guff about "fast markets". When pressed however, he admitted that to have adjusted the price in line with supply and demand so as to have rebalanced the book would have given clients 'free profit' at 'artificial prices' and would not hav emade sense "if you want to run a business".
For that I read "we don't expect our customers to call the market better than us, and if they do, we'll just manipulate prices."
As for "artificial prices", I think we can all see that the only prices that are artificial are IGs. Here's my advice on what to do with a barge pole - I'm stopping spread betting on house prices and will steer clear for the foreseeable future.