Spread to hedge against a fall in the housing market

[DiamondLake]

Hi,
I am currently looking at the possibility of buying a house. I don't think that it is a good time to do so but, because I may be made redundant and have to work as a contractor, I am likely going to be in the situation that I buy one now, or have to wait three years and then still not be able to get the mortgage I need.

The reason that I don't think it is a good time to buy is that I consider that there is much more potential downside in the house prices than upside, with potentially a lot of downside over the next 2-3 years.

Therefore, if I do end up buying, I am keen to hedge against a market fall if at all possible.

I am only starting to look at approaches, but I noticed that in the latest issue of Investors Chronicle, it was suggested that spreadbetting against the Halifax House Price Index, might be one way to go.

The houses that I would be looking to buy are in the range of about £500,000 - so I would suspect that to completely hedge I would need to take out a position of £5,000 a percentage point.

Then if we get the fall that I fear (30%) I think that position would be worth £150,000 and if we get the maximum increase that I predict (10%) I think I would be down £50,000.

Because that potential £50K loss is substantial I would ideally like to buy put options on the index, although I would expect that they would be expensive, and people generally seem to suggest spreads.

Because spread betting is completely new to me, I wondered if anybody could please give me a bit of a reality check in terms of whether this is a good approach. If I buy the house I will still have access to £200,000 (with about £50K cash and £150,000 invested in equities), plus enough income to cover the mortgage and living expenses.

I would imagine putting a stop at about 10%, and I do anticipate wanting to hedge for the next 2-3 years to see what the market is going to do next.

I understand that by doing that I really make the property a zero sum gain, because any increase in house price is going by negated by the loss on the spread.

One thing that I don't understand is how much that kind of spread is going to cost me to finance, whether the index stays put or whether it moves in one direction or the other.

As I say, I am just exploring possibilities at the moment, so any advice, including brutal honesty is more that welcome.

Thanks in advance for any help.

Martin

 

[Jack o'Clubs]

A quick answer - holding the position for a number of years is likely to be very expensive in terms of roll-over costs since the last time I looked there was a hell of a spread on these products. I'd also be very nervous at having such a big position on IG's book. Not that I think there's anything shifty about IG but I'd still be cautious at having such a big position on one illiquid product that had to be regularly rolled-over. You'll also need to deposit margin of around £45k to bet at that size, notwithstanding what you'd need to put in to cover any move against you up to your stop loss.

You might do better looking at shorting stocks that would be impacted by a housing crash, such as the housebuilders which would be cheaper to finance over that period, or even a basket of consumer/retail stocks given the implications for the UK economy of a decline in house prices of that size.

 

[montmorencyt2w]

Interesting idea, but has drawbacks as Jack has pointed out.

Another approach perhaps: buy a run-down property in a good area, and use some of that potential hedge money to do it up, following the methods of Sarah Beaney (Property Ladder), and similar programmes.

If the market picks up, you should make some profit on that, plus the improved value.
If it doesn't pick up, at least the improved value is a sort of hedge.
Follow the advice of the experts though and keep costs down, etc.


You could always learn to trade on the side as well, and see if it's for you.

 

[SvenFoster]

You already have some of the best protection you can get....
...We live on an island short on housing, getting smaller by the day
Buy near good schools/facilities and commuting and you cant go far wrong assuming your there for years not trying to make a quick buck.

If you've got loads of cash then reduce your mortgage or trade it to pay off your mortgage early.

The way I look at it is that the mortgage lenders historically favoured a 25% deposit but in recent times they made 100% mortgages out of greed.
Why does a mortgage company want you to put up 25%...because historically that is the kind of figures that we see in housing crashes...their money is safe yours is at risk.
A lot of *good* houses are down 25% a lot of rubbish is down more than that...

..hmm which to buy.

Course I dont actually know anything, I just believe that. lol. good luck

 

[tar]

A quick answer - holding the position for a number of years is likely to be very expensive in terms of roll-over costs since the last time I looked there was a hell of a spread on these products. I'd also be very nervous at having such a big position on IG's book. Not that I think there's anything shifty about IG but I'd still be cautious at having such a big position on one illiquid product that had to be regularly rolled-over. You'll also need to deposit margin of around £45k to bet at that size, notwithstanding what you'd need to put in to cover any move against you up to your stop loss.

You might do better looking at shorting stocks that would be impacted by a housing crash, such as the housebuilders which would be cheaper to finance over that period, or even a basket of consumer/retail stocks given the implications for the UK economy of a decline in house prices of that size.

the deposit required is 5% only

http://www.igindex.co.uk/spread-betting/house-bet-details.html