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Rbs To Offer House Price Derivatives

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RBS to offer house price derivatives

The Royal Bank of Scotland is preparing to launch residential derivatives products aimed at retail investors who are prepared to bet against the odds that house prices will rise.

The bank’s own residential lending exposure means it will act as the counterparty to the trades, which will be pegged against future increases in the Halifax house price index.

However, the forward curve for residential derivatives – the nearest thing to a property futures market – is pricing in a 10 per cent price drop to house prices in 2011.

Naomi Yarrow, RBS derivatives trader, believes investors could use the products as an alternative to buy-to-let, or as a diversifier for those who are looking to buy a house at a future point, perhaps for children.

“If house prices go down, the discount means you still get a bit of uplift, and house prices will then be cheaper for you to buy,” she says.

Requiring a minimum investment of £10,000, the two products from RBS will launch in the new year and have either a four-year or an eight-year lifespan, tempting investors to gamble on medium-term house price growth.

The risk of launching a property derivative product in the current regulatory climate will be tempered by the fact that these notes are capital protected, meaning investors will get their initial investment back at the end of the term, with any house price growth on top.

The eight-year buy-to-let capital protected note is designed “to replicate an investment in residential property” without the hassle of property maintenance or finding a large deposit. Instead of the traditional rental yield, investors will receive a fixed annual coupon of less than 3 per cent through the eight-year term, plus capital growth linked to the house price index upon maturity.

The four-year product offers a separate zero coupon note, issued at a discount of about 10 per cent to the December 2009 house price index, and any positive growth from this point is paid out after four years.

On a quarterly like-for-like basis, the Halifax house price index has been in negative territory for eight months, with November showing a drop of -2.1 per cent, the biggest monthly fall since January. However, estate agents Savills predicts a return to house price growth in 2012, anticipating average UK prices will rise by 12 per cent in the next five years.

This means that, assuming the average house price index rises 40 per cent over the term of the eight-year product, allowing for the coupon, investors would receive a total return of 7.6 per cent per year. If it increases 10 per cent, total returns would be 3.6 per cent.

But Neil Young, chief executive of residential property investor Young Group, warned: “The biggest attraction of buy-to-let property investments today is extremely strong rental growth, and these products won’t replicate that at all.”

Hmm. Sounds right dodgy. Any kunt in the business can fudge the Hallyfax numbers though.

Savills. Hehe, how can anybody possibly know what the economic climate will be in 6 months, let alone five years.

What a bunch of mugs we all are.

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tempting investors to gamble

Substitute 'punters' for investors and all that's left is gambling. What has any of this got to do with the optimal allocation of our societies capital?

Who the f*ck are these people? What are they for?

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This product is unneccesary - if you want to protect against a 10% fall in prices just short banking shares.

Good man. The basic correlations are not that hard to figure out.

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Really? I thought the banksters can now make money whatever the weather. Especially now as the tax man is standing behind them with a safety net.

The way that bankers make money is no longer relevant to me. The ways that we (i.e. the non-bankers) protect and possibly make money are much more important.

Cannedfish's comment relates to the opportunity for the longs to protect against falling house prices without paying RBS a large fee. I commend his logic and the opportunity to save money and avoid paying bankers a fee.

If one has the opposite view (rising house prices), better returns will be available through ownership of RBS shares than home ownership with less bother and much lower transaction fees paid to bankers and other agents.

The crux of his / her argument is that positions in bank shares are a much cheaper and efficient way to express an opinion than owning or selling a house regardless of one's views about the evolution of house prices. I cannot see any reason to refute this argument.

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This product is unneccesary - if you want to protect against a 10% fall in prices just short banking shares.

These products aren’t designed to protect against a fall in prices, although it’s understandable that you would think that because the first para of the article is very badly worded. They’re aimed at investors who think prices will rise.

At the retail investment level we need to see the small print to draw any real conclusions. On the face of it the four year product is offering a 2% p.a. compound return if house prices stand still for the next four years.

Before dismissing it as a joke, I’d presume that the product will be easy for investors to sign up for and wouldn’t involve the sort of sophistication that would be needed for share or option strategies. It’s something that might appeal to (say) someone who has sold-to-rent but who is uncomfortable with the all-or-nothing position they may be in at present, or someone who has a large cash fund and is worried that house prices may run away from them and wants to offset some of that risk.

It’s also worth considering whether the Halifax index will measure the true extent of any forthcoming falls in prices. In the last crash the Halifax index only showed a 13.2% nominal drop from peak to trough, and I think most people would agree that the reality was much more than this. [Edit: What I mean by this is that there are strategies that come to mind with a product like this if the Halifax index doesn’t capture the true drop in house prices in a falling market.]

Like I say, we need to see more details before it’s worth considering strategies.

Edited by FreeTrader

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Sounds a lot like spread betting to me. Don't the likes of IG already offer similar products?

But surely in the case of RBS, they are themselves a major player in the market, making for a massive conflict of interest!

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RBS to offer house price derivatives

Hmm. Sounds right dodgy. Any kunt in the business can fudge the Hallyfax numbers though.

Savills. Hehe, how can anybody possibly know what the economic climate will be in 6 months, let alone five years.

What a bunch of mugs we all are.

...sick Bank rescued from the mud...by taxpayers ....and they now continue with casino style banking ....bring in a new management team ...this lot are going nowhere fast...... :rolleyes:

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These products aren’t designed to protect against a fall in prices, although it’s understandable that you would think that because the first para of the article is very badly worded. They’re aimed at investors who think prices will rise.

At the retail investment level we need to see the small print to draw any real conclusions. On the face of it the four year product is offering a 2% p.a. compound return if house prices stand still for the next four years.

Before dismissing it as a joke, I’d presume that the product will be easy for investors to sign up for and wouldn’t involve the sort of sophistication that would be needed for share or option strategies. It’s something that might appeal to (say) someone who has sold-to-rent but who is uncomfortable with the all-or-nothing position they may be in at present, or someone who has a large cash fund and is worried that house prices may run away from them and wants to offset some of that risk.

It’s also worth considering whether the Halifax index will measure the true extent of any forthcoming falls in prices. In the last crash the Halifax index only showed a 13.2% nominal drop from peak to trough, and I think most people would agree that the reality was much more than this. [Edit: What I mean by this is that there are strategies that come to mind with a product like this if the Halifax index doesn’t capture the true drop in house prices in a falling market.]

Like I say, we need to see more details before it’s worth considering strategies.

Do you know anything about what happened to their £4.7bn securitisation offer?

http://uk.reuters.com/article/idUKTRE68D19620100914

Is this new offer perhaps because that didn't work out well so they are trying to raise money and hedge their mortgage book in other ways?

Could it also be because they think interest rates will rise? 2% compounded per year would look poor if interest rates rise AND an increase in the interest rate wouldn't help house prices would it?

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Do you know anything about what happened to their £4.7bn securitisation offer?

http://uk.reuters.com/article/idUKTRE68D19620100914

Is this new offer perhaps because that didn't work out well so they are trying to raise money and hedge their mortgage book in other ways?

Could it also be because they think interest rates will rise? 2% compounded per year would look poor if interest rates rise AND an increase in the interest rate wouldn't help house prices would it?

I don’t know much about that offer, but I presume it went okay because it was a prime RMBS securitisation. It was basically a funding exercise for RBS.

These proposed derivative products will be tiny in comparison to that securitisation. The FT is reporting that RBS only expects to write some £50m of business on the back of this.

I doubt the two are in any way related and I’m not going to speculate further on scenarios/motives until I’ve seen the full details.

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...sick Bank rescued from the mud...by taxpayers ....and they now continue with casino style banking ....bring in a new management team ...this lot are going nowhere fast...... :rolleyes:

The banks are gambling now rather than lending! :huh:

I got stuck behind a load of numpties buying scratch cards and lottery tickets in the shop today!

Big business seems to follow the people somehow!

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The banks are gambling now rather than lending! :huh:

I got stuck behind a load of numpties buying scratch cards and lottery tickets in the shop today!

Big business seems to follow the people somehow!

Why wouldn't they gamble? Recent events have confirmed they are free bets. Keep any winnings but taxpayers cover the losses.

A bit more about this RBS property derivative from earlier in the year:

http://www.citywire.co.uk/wealth-manager/the-dangers-of-rbs-residential-property-derivative/a383192

http://uk.finance.yahoo.com/news/derive-benefits-from-property-derivatives-ftimes-ce74f9010a62.html?x=0

"an irresponsible move for a government-controlled bank, as speculators could profit from a future property crash."

The spivs and specs on the side of HPC?

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Why wouldn't they gamble? Recent events have confirmed they are free bets. Keep any winnings but taxpayers cover the losses.

Oh Crikey Mr Sly! :huh::(

I did read those articles! Thanks for that!

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IG do 2 points on quarterly Halifax with one point being £1,000, so you start off with a loss of 2 x £ per point (minimum £10) depending on where they place it and where you think house prices will go.

RBS are offering 4 year with no coupon but 10% off the December 2009 Halifax of £169,042 making it £152,138 then after 4 years the capital growth, if house prices rise to £217K? you make 42% x capital (minimum example £10,000)= £4,200 profit

8 year 3% coupon = £300 a year x 8 = £2,400 + £338K ? 100% x capital = £12,400 profit

IG 4 quarters 2.8 points, they think house prices will go down and offer 166.2 - 169 buy in at 166.2 £1,000 per point house prices fall to 150K in 12 months you make £16K profit and close.

It looks like the RBS offering is low rate bond rate and probably covering itself somewhere else. 8 years is too long I think and like betting the upside is unlimited so why get in early with a low

return if house prices take off when you should be getting in and riding it all the way up. The downside is limited to zero or maybe £80K house prices realistically.

Doesn't make sense to me unless you have the price of a house in cash and also plenty of spare money for the enxt decade.

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Sounds like that bunch of lads in NY who bet billions on a HPC occuring. Who was it, Lehmans? They made billons on the crash too!

The banksters are still at it with our money--creative products are the same as printing money. So complex you cannot get to the bottom of it except to to realise its just a continuation of the PONZI.

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I’d presume that the product will be easy for investors to sign up for and wouldn’t involve the sort of sophistication that would be needed for share or option strategies.

....it will be a sophisticated scam ....who decides the house rise / fall levels ....?

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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