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Hedging Against Hpc


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#1 Luminist

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Posted 13 March 2011 - 06:18 PM

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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#2 Scott Sando

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Posted 13 March 2011 - 06:25 PM

Gold.

#3 Mixle

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Posted 13 March 2011 - 06:32 PM

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, 13 March 2011 - 06:36 PM.


#4 Luminist

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Posted 13 March 2011 - 06:46 PM

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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#5 Luminist

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Posted 13 March 2011 - 06:47 PM

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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The debt masters pose the greatest peril,
Let's thoroughly uncover their ruses!
Arise! Arise! Arise!
May our thousand protests sound as one,
Let's not fall for our foes' tricks, Press on!
Let's not fall for our foes' tricks, Press on!
Press on! Press on! On!
</i><!--sizec--></span><!--/sizec-->
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#6 Bruce Banner

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Posted 13 March 2011 - 06:54 PM

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



----------------------------------------------------------------------------------------------------------
Lest there be any doubt.

No I believe prices will fall and am astounded that a so called Conservative led government could act in such a stupid way. As you can see from today, there are 2,000 HtB applicants and it has been on MSM none stop all day and they make up about 3.5% of a typical months mortgages.

BTL is a good potential way to bankruptcy and yes sometimes I make points to hopefully make people think.


#7 FIGGY

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Posted 13 March 2011 - 07:02 PM

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

#8 Luminist

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Posted 13 March 2011 - 07:04 PM

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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<!--sizeo:1--><span style="font-size:8pt;line-height:100%"><!--/sizeo--><i>
Arise! All who refuse to be slaves!
Let our shared knowledge become our Great Wall!
The debt masters pose the greatest peril,
Let's thoroughly uncover their ruses!
Arise! Arise! Arise!
May our thousand protests sound as one,
Let's not fall for our foes' tricks, Press on!
Let's not fall for our foes' tricks, Press on!
Press on! Press on! On!
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#9 Mixle

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Posted 13 March 2011 - 07:06 PM

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.

#10 Bruce Banner

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Posted 13 March 2011 - 07:07 PM

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.
.



----------------------------------------------------------------------------------------------------------
Lest there be any doubt.

No I believe prices will fall and am astounded that a so called Conservative led government could act in such a stupid way. As you can see from today, there are 2,000 HtB applicants and it has been on MSM none stop all day and they make up about 3.5% of a typical months mortgages.

BTL is a good potential way to bankruptcy and yes sometimes I make points to hopefully make people think.


#11 Number79

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Posted 13 March 2011 - 07:11 PM

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

Posted Image

you got it the wrong way around.

Edited by richyc, 13 March 2011 - 07:12 PM.


#12 Luminist

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Posted 13 March 2011 - 07:12 PM

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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<!--sizeo:1--><span style="font-size:8pt;line-height:100%"><!--/sizeo--><i>
Arise! All who refuse to be slaves!
Let our shared knowledge become our Great Wall!
The debt masters pose the greatest peril,
Let's thoroughly uncover their ruses!
Arise! Arise! Arise!
May our thousand protests sound as one,
Let's not fall for our foes' tricks, Press on!
Let's not fall for our foes' tricks, Press on!
Press on! Press on! On!
</i><!--sizec--></span><!--/sizec-->
Inspired by the <a href=" target="_blank">National Anthem of the People's Republic of China</a>

#13 Mixle

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Posted 13 March 2011 - 07:12 PM

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.

#14 Luminist

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Posted 13 March 2011 - 07:17 PM

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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<!--sizeo:1--><span style="font-size:8pt;line-height:100%"><!--/sizeo--><i>
Arise! All who refuse to be slaves!
Let our shared knowledge become our Great Wall!
The debt masters pose the greatest peril,
Let's thoroughly uncover their ruses!
Arise! Arise! Arise!
May our thousand protests sound as one,
Let's not fall for our foes' tricks, Press on!
Let's not fall for our foes' tricks, Press on!
Press on! Press on! On!
</i><!--sizec--></span><!--/sizec-->
Inspired by the <a href=" target="_blank">National Anthem of the People's Republic of China</a>

#15 Bruce Banner

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Posted 13 March 2011 - 07:20 PM

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.
.



----------------------------------------------------------------------------------------------------------
Lest there be any doubt.

No I believe prices will fall and am astounded that a so called Conservative led government could act in such a stupid way. As you can see from today, there are 2,000 HtB applicants and it has been on MSM none stop all day and they make up about 3.5% of a typical months mortgages.

BTL is a good potential way to bankruptcy and yes sometimes I make points to hopefully make people think.





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