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Luminist

Hedging Against Hpc

39 posts in this topic

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?

right now I would say you have the best hedge by being out and able to add to your savings, things looking not so obvious at the moment so I would leave it as cash and take the time to work it all out.

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This is Robert Shiller a couple of years ago on the kind of product you're looking for - doesn't seem to have caught on in the US yet, so looks like your hopes are dashed!

The company you started, MacroMarkets, just got approval for tradable securities linked to the Case-Shiller house-price index. How does that factor in?

One reason we have bubbles in the housing market is because there's been no way to short housing [that is, to make money when prices fall]. The ability to short is essential to an efficient market, otherwise there's nothing to stop zealots from pricing things abnormally high. If you buy one of these long securities, called UMM, it's like buying a house, except you don't have to go through the real estate agent, take possession of a property, maintain it, rent it out. But we also have the DMM, which is short housing. Markets like this will also create an infrastructure for products. For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.

The Case-Shiller housing futures that trade on the Chicago Mercantile Exchange haven't really taken off, though.

I know. It's bizarre. People are fascinated by housing they want to read the home section of the newspaper and gossip about it. But they don't seem to want to trade it. I think it's all a matter of getting it right. And we continue to work on it. It's like insurance. They invented life insurance in the 1600s, but it didn't become common until the 20th century.

Read more: http://www.time.com/time/business/article/0,8599,1896583,00.html#ixzz1GVleh0gB

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right now I would say you have the best hedge by being out and able to add to your savings, things looking not so obvious at the moment so I would leave it as cash and take the time to work it all out.

If you are sure houseprices will fall, id say this is always the best bet unless you are prepared to lose some Capital

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If you are sure houseprices will fall, id say this is always the best bet unless you are prepared to lose some Capital

even if you werent sure would you agree that staying cash may still be the best option now? If prices start to rise then once you are sure of the trend change then at least you can move quickly.

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even if you werent sure would you agree that staying cash may still be the best option now? If prices start to rise then once you are sure of the trend change then at least you can move quickly.

well im slightly bias because i think cash is a great place to invest in for the next 2 to 3 years but id also agree in general because its pretty stress free compared to other assets crossed with houses

Edited by Tamara De Lempicka

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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

So what you're saying is you can afford to buy a house and want to do so, and you want ideas about how to not lose money on it, even though you know you will over the next few years, through some sort of gambling?

Isn't this the same thinking that landed us with CDOs, MBSs and all the other financial alchemy that has served us so well?

I'm with Bruce. Sell the house (or rather not buy it in the first place). Alternatively invest in a magic set.

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Absolutely! Only an estate agent would recommend buying a house at the moment ;).

Wouldn't equities, PMs, increasing pension contributions, giving to charity, or just about anything beat cash in the bank right now???

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Wouldn't equities, PMs, increasing pension contributions, giving to charity, or just about anything beat cash in the bank right now???

Most people lose money on the stock market.

PMs are fine for a few grand, but a few hundred grand?

Increased pension contributions, I'm retired ;).

Giving to charity, I'm not that generous.

You forgot to mention buying a house :lol:.

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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

The spreadbet you mentioned is in fact the accurate hedge. The difference in price does NOT reflect expectations or "betting" on IG Index's side for future house price drop, but rather it's the forward price for the house index, i.e. the arbitrage-free future expected price, which is equal to spot plus the cost of carry. What most people forget when comparing asset prices in different time frames is that some assets have positive cash flows (they pay dividends/rent/interest), whereas others cost in order to own (most commodities require storage and/or insurance). The forward price reflects this. In the example you mentioned, the mid quoted price is 5.7% below spot, which reflects a rental yield of approx. 8% annualized. That means that if the rent you save by buying the house is equal to that figure (which must reflect the national average more or less) than you have your perfect hedge right there.

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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

FIGGY.... is the winner

what will be the answer in 2012?

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FIGGY.... is the winner

what will be the answer in 2012?

Whoops. What were you supposed to be hedging against?

House prices went nowhere very much in 2011. So a hedge against their changing shouldn't have moved hugely either!

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Whoops. What were you supposed to be hedging against?

House prices went nowhere very much in 2011. So a hedge against their changing shouldn't have moved hugely either!

fair point!

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