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Luminist

Hedging Against Hpc

39 posts in this topic

This topic must have been discussed before but a Google search didn't bring it up. What would be a good hedging instrument one could invest in to provide a good hedge against a HPC? By good I mean the following:

1. The instrument has to be investable, i.e. a market exists for it.

2. One has to have the ability to go short it.

3. The dealing costs have got to be as low as possible.

4. It has to be a fairly liquid vehicle, so can exit quickly.

5. It has to have a high correlation with a house price index statistically.

6. It can be a compound instrument made up of several different securities, e.g. 40% interest rate future, 40% house builder shares, 20% FTSE 100.

Now, IG Index does a house prices bet which satisfies some of these requirements (except spread is a bit high) but this cannot be used because the current bid/ask prices are well below what the current HBOS Standardised Average House Price is at the moment, i.e. IG Index are betting that house prices will fall and are accounting for this in the prices that they are offering to spreadbetters. At the moment, the current prices for the Dec 2011 house price bet from IG Index is 151.9/154.9 a spread of 3.0 but the current HBOS House Price Index stands at 162.7 so if you were to go short then house prices will have to fall by more than about £10,000 on an average £162.7k house before December of this year for you to start making a single penny from this bet. Obviously this precludes this instrument from being used as a house price hedging instrument. Also, IG Index have a limit of how many pounds per point you can put on (I think £250 per point, you need £1,000 per point if you were going to do a 100% hedge).

So the question is, what other possibilities are there? If you can figure this out now, then there is no reason at all why you couldn''t buy a house right now and not fear an HPC

Best,

L

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Gold.

The natural hedge to the House Price (houses per pound) is more obviously, the pound.

That is to say, cash is the natural hedge for HPC.

Gold would be a hedge for the pound.

Edited by Mixle

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Gold.

Curt answer, maybe you could offer some justification for this assertion? Have you seen a graph of the gold price over the last 20-30 years alongside a graph of a house price index? Seems like gold and house prices have been more in tandem than not over the last 10 years (positive correlation) which suggests that a strategy to hedge against a house price crash would be to short gold at this point to the value of the house. Is this what you are suggesting?

Best,

L

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The natural hedge to the House Price (houses per pound) is more obviously, the pound.

That is to say, cash is the natural hedge for HPC.

Gold would be a hedge for the pound.

So what would the investable strategy be?

Best,

L

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Not sure that logic holds up.

The reason the VIs are pointing to the savings rates is because its an easy thing for Joe public to get their head around and not because cash is a hedge against HPC.

I could be worng but why do you think cash is a good hedge.

At a guess I would say shorting the banks would be a good hedge

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Cash, any interest you get is icing on the cake.

I assume you mean don't buy in the first place and keep your cash? Well, ok, that's a different scenario, and in that case there would be no need to talk about hedging anything at all would there? I am talking about the case where the house is bought, deal is done. Now, given this, what is the best proxy to use to hedge against this soon to be falling asset?

Best,

L

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So what would the investable strategy be?

Best,

L

Keep spare cash spread across safe vaults and institutions.

If you're alluding as to how much, where, how long and etc., there are lots of places for cash.

Santander home buyer savings account gives 5% for £5k if you make regular additional deposits last I heard.

Then there are lots of other places on the high street, Cash ISAs, First Direct, HSBC, Barclays, Nationwide, etc.

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I assume you mean don't buy in the first place and keep your cash? Well, ok, that's a different scenario, and in that case there would be no need to talk about hedging anything at all would there? I am talking about the case where the house is bought, deal is done. Now, given this, what is the best proxy to use to hedge against this soon to be falling asset?

Best,

L

I'd just sell the house.

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Curt answer, maybe you could offer some justification for this assertion? Have you seen a graph of the gold price over the last 20-30 years alongside a graph of a house price index? Seems like gold and house prices have been more in tandem than not over the last 10 years (positive correlation) which suggests that a strategy to hedge against a house price crash would be to short gold at this point to the value of the house. Is this what you are suggesting?

Best,

L

housing-29-_image004_0000.gif

you got it the wrong way around.

Edited by richyc

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To Mixle/Bruce Banner,

I think you are missing the point of my original post. I am asking that if you were in a position to buy a house and were going to do it in any case (for non-financial reasons), what is the best way to hedge against subsequent house price falls (because you are savvy)?

Best,

L

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I assume you mean don't buy in the first place and keep your cash? Well, ok, that's a different scenario, and in that case there would be no need to talk about hedging anything at all would there? I am talking about the case where the house is bought, deal is done. Now, given this, what is the best proxy to use to hedge against this soon to be falling asset?

Best,

L

Well then you're in a pickle, because as stated in OP, everyone is estimating a reduction in price. You can't really hedge around the part that is already expected. You can hedge against a more massive fall, and yes it's not cheap. You've already listed the main methods.

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Well then you're in a pickle, because as stated in OP, everyone is estimating a reduction in price. You can't really hedge around the part that is already expected. You can hedge against a more massive fall, and yes it's not cheap. You've already listed the main methods.

ok, now we are getting somewhere. Never say impossible, there is always a way to do something, even if it's 80% effective. This is the quest which I'm surprised that a website like this is not dedicated more to solving. So are you saying that the financial markets are all expecting a fall in house prices? The general public seem to be in the opposite camp. Where is the arbitrage opportunity in this? Time to start the collective brain, people

Best,

L

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To Mixle/Bruce Banner,

I think you are missing the point of my original post. I am asking that if you were in a position to buy a house and were going to do it in any case (for non-financial reasons), what is the best way to hedge against subsequent house price falls (because you are savvy)?

Best,

L

I am in a position to buy a house, for cash, but I prefer to keep the cash in the bank and rent a house to live in. I can't think of a better defence against falling house prices.

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ok, now we are getting somewhere. Never say impossible, there is always a way to do something, even if it's 80% effective. This is the quest which I'm surprised that a website like this is not dedicated more to solving. So are you saying that the financial markets are all expecting a fall in house prices? The general public seem to be in the opposite camp. Where is the arbitrage opportunity in this? Time to start the collective brain, people

Best,

L

Yes, market expects fall. Have you asked the general public? Anecdotally, I think a fall is widely expected. It has been in the papers a while now. More critically, many VIs are already leveraged and therefore unable to take the other side of the bet.

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I am in a position to buy a house, for cash, but I prefer to keep the cash in the bank and rent a house to live in. I can't think of a better defence against falling house prices.

+1

although if done at the right time some other things would be helping nicely like shiny metal, stock, ns&i etc

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Yes, market expects fall. Have you asked the general public? Anecdotally, I think a fall is widely expected. It has been in the papers a while now. More critically, many VIs are already leveraged and therefore unable to take the other side of the bet.

even those that dont expect a fall are expecting their mortgages to increase, they just havent joined up the dots yet.

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+1

although if done at the right time some other things would be helping nicely like shiny metal, stock, ns&i etc

In my case, NS&I and EUR ;).

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In my case, NS&I and EUR ;).

Out of interest...

Ok, so buy EUR as the EUR is likely to rise against sterling im guessing.... :huh:

Why is it good to invest via ns&i?

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i wouldnt of thought it was worth it now, maybe a year ago. Any forward looking instruments would already be priced accordingly as you highlight with IG, shares wouldnt be particularly good as they are too high beta.

Thats leaves marrying someone filthy rich as your best bet so you dont give a toss if they fall

Edited by Tamara De Lempicka

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Out of interest...

Ok, so buy EUR as the EUR is likely to rise against sterling im guessing.... :huh:

Why is it good to invest via ns&i?

no, no, he answered my post when I mentioned other things done at the right time. This isnt it. I still like the odds on metals though along with other commodities.

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Out of interest...

Ok, so buy EUR as the EUR is likely to rise against sterling im guessing.... :huh:

Why is it good to invest via ns&i?

My EUR bought at 1.5 EUR/GBP are doing well.

NS&I are paying me 3.9% (not available for new deposits) and are, arguably, as safe as you can get.

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My EUR bought at 1.5 EUR/GBP are doing well.

NS&I are paying me 3.9% (not available for new deposits) and are, arguably, as safe as you can get.

Ahh I see, thanks.

Ive had an offer on my property leaving me a decent amount to hold on to until prices (hopefully) drop. In the meantime, im going back with the folks to continue saving to put towards any future house purchase......any ideas what do do with the $$ in the meantime?

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