Punters aim to cash in even if house prices fall

It was not long ago that dinner parties in the south-east were dominated by guests trying to out-do each other with claims about how much their homes had risen in value.

No longer. The market has cooled and yesterday Hometrack’s August house price survey reported an average fall in prices of 0.1pc – the 14th in a row.

Naturally with interest in house prices high, spread betting companies have set up markets to enable people to speculate. Both IG Index and rival Cantor run spreads on the housing market, using pricing data provided by mortgage lender Halifax.

IG now reckons interest rates, currently at 4.5pc, could be down to 4pc by the end of the year. Could this reignite the market? Not if the spreads are anything to go by. The mid-price of IG’s spread suggests that the average UK house price is due to be 2.8pc cheaper by June 2006 (the table shows the spreads for nationwide house prices for the quarter ending December 31 and June 31, 2006).

However, it is the regional breakdown that speculators really like to get their teeth into. Here IG’s spreads suggest Scottish house prices will enjoy a 6.2pc rise over the same period while East Anglia will show a 3.7pc fall.

The bets work like this. If you think prices will rise by more than the spread by, say, December 31, you buy the spread. As with any spread bet you can close your position and take profits if you buy the spread and it rises by selling the spread at a higher level. The reverse is true if you sell the spread. The last day of trading is the end of the quarter on which the punter is betting although bets are not settled until the official data is released by Halifax.

In total, IG offers 48 different markets over the next four quarters, covering 12 regions of the UK. Rival Cantor has two markets for average UK and London prices over the next five quarters.

Could spread bets be a way to protect yourself against a crash? Well, theoretically. Selling the spread would produce a profit if house prices fell. It would be possible to link the size of your bet to the value of your house, so if your house started to fall in value, your spread bet would cushion the blow.

However, short of selling your house, you would have to have enough cash to pay the bookmaker if prices were to rise, leaving your bet in the red. Also, the difficulty with these markets is that they only cover large regions of the country, such as the south- east or the north-west, as well as the national picture.

As IG’s Will Armitage says: “These prices can’t be a perfect hedge for a homeowner as each abode is unique and nobody lives in the perfect average house.”

It is a fair point. While prices may shoot ahead in most parts of the south-east, that will not do you much good if the local council is planning to build a tip near your des res.

Cantor’s David Buik says his company would like to be able to offer a much wider range of spreads covering individual districts. There is much greater volatility in smaller regions but at present the necessary data to enable the bookmaker to calculate winnings and losses for this type of bet is not available

Mr Buik says: “It would be beneficial to everybody to find an arbitrator who could offer the agreed price on a more parochial basis because local pricing is so important for individuals

“We are still looking and would be interested to hear from anyone who could supply the data.”

This entry was posted on Saturday, August 27th, 2005 at 9:49 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.