Property Price Hedging

I can't really see the need for hedging, unless you are mortgaged to the hilt, think you may want to move in the near future, and want to make sure you avoid negative equity. Assuming your flat is simply a place to live and so part of your "cost of living", then your bets are "hedged", in that if the price goes down, your cost of living will go down by exactly the same.

If you want to make money out of falling prices, I guess you could sell house building companies on the futures market?

if you have no need to move, you can 'hedge' by staying put, either until prices rise to where they were, or until you come out of negative equity (if it ever gets that bad). Also, you are better off if you decide to get a bigger house (as long as you arent in negative equity.)

I have chosen to "hedge" against falling property prices by overpaying my mortgage as much as I can. That way I reduce the chances of me being in negative equity.

If you have this flat as somewhere to live, then the actual value is totally irrelevant until you come to sell[1]. When you do come to sell, you will probably want to buy another property. If this is the case then changes in prices will largely cancel out, in fact, if you are buying a bigger property a fall in price will help you.

Consider my highly simplified and exaggerated example:

a) current property worth 100k, want to by property worth 150k, need 50k more.

b) Property prices drop 50%, current property worth 50k, want to buy property worth 75k, need 25k more.

In case b) you will also pay less in estate agent's fees and stamp duty.

If you bought your flat as an investment, then hedging against loss will also reduce your gain should prices rise. Unless you are very lucky/clever you will end up loosing a small amount which ever way prices move. Of course, that may be preferable to the risk of loosing a large amount.

1] Ok, you may want to re-mortgage in which case the value would be relevant.

"Gareth" wrote

Or what about the following example:-

a) Current property worth 100k, want to buy property worth 150k, need 50k more.

b) Current property price drops 45%, new property price drops 30%, current property now worth 55k, want to buy property worth 105k, still need 50k more...

You see, lower-priced properties may have bigger percentage rises/falls than higher-priced properties!

Or what about the following example:-

a) Current property worth 100k, want to buy property worth 150k, need 50k more.

b) Current property price drops 30%, new property price drops 45%, current property now worth 70k, want to buy property worth 82.5k, only need 12.5k more...

You see, higher-priced properties may have bigger percentage rises/falls than lower-priced properties!

"Andy Pandy" wrote

That's exceedingly unlikely. Have you ever seen it happen much?

Whereas quite often smaller properties (eg studio flats) go up (or down) by much higher percentages than bigger properties...

Actually I'll have to conceded that you are quite correct. Looking at the data, flats do seem to be far more volatile than houses, especially detached, during the last "bear" market in housing in the early 90's flats plummeted whereas detached houses actually increased slightly in price! Semi's and terraced went down slightly.

I remember when I was looking for my first property in 1990, I originally intended to buy a flat but I couldn't believe what a rip off they were, I could get a 3-bed terrace or small semi for the same price as a one bed flat! And no maintenance charges.

The thing is that as an [amateur] shares trader and spread better when I see a market at or near a peak my instinct is to sell! Yes you can always wait around for the market to recover - and in fact the historical data tells us that this is a pretty good strategy - but if I can make money out of something I am fairly sure will happen then that is what I'll do.

Your second point I take, anyone wishing to trade up or get into the market would in general be better off after a fall in prices.

Colin.

Well there is no /need/ for hedging, I just like to make money where I see an opportunity :) And so long as I hold a mortgage of the same value(that is, I don't trade up) then my cost of living stays the same no matter what.

Colin.

Yes I overpay quite a bit as well. It of course reduces interest payments and in turn reduces risk [in the event of interest rate rises].

The price isn't completely irrelevant. Knowing how much it is worth relative to the market as a whole allows me to gauge what sort of property I may be available to afford in the near future should I decide to move. And in the bigger picture high property values and record mortage debt are currently driving the economy to a certain extent - whether this is logical or not, that is what is happening. Percieved wealth is keeping people spending.

But yes, I take the point. Thanks.

Colin

I suppose this because property prices (like all other assets) are actually driven by relatively small number of people (in relation to the total number of owners) that are buying an selling. So if there is an upset in the employment rate and/or currency inflation is high then the amount of income available to new buyers is reduced. Couple this with the fact that new buyers generally buy at the low end (e.g. flats) and this may mean that general price movements are greater in cheaper properties.

One word - location!

Colin

intended to

I was looking for both in the same location! One bed flats literally on the other side of the road from 3 bed terraces were going for more!

Fair enough, but that's not really "hedging", which is attempting to mitigate losses rather than make money.

Exactly. And if you move any loss in value will hopefully be reflected in the loss of value of the next property you buy.

I reached the same conclusion - I can't understand why they don't offer products with longer durations.

The only other option is a CFD on a mortgage bank such as Bradford & Bingley or Alliance & Leicester.

Daytona

Well I guess with the quarterly spreads as they stand they don't actually have to put much effort into covering their customers positions because the positions just aren't going to move that much. Therefore it was/is a quick and easy way of providing a property index spread bet - which the competion doesn't offer AFAIK.

Yes or construction companies as I think someone further up the thread suggested - which is probably what I'll end up doing after a tad more research.

Regards,

Colin.

Yeah, property companies can be pretty volatile. I doubled my money investing in Barratt when they were ridiculously undervalued last year.

Daytona

They can, but generally in a housing boom, lower priced houses rise faster, as that is all people can afford. The reverse will happen when the boom unwinds.