Monday, August 4, 2008

Follow the money

Property prices may fall 30% by 2011

House prices are expected to fall by almost 30% during the next three years according to the leading indices of property price futures. About £50,000 will be wiped off the value of the UK average house price of £185,000 by 2011 judging by current trading on spread betting platforms, more than most commentators currently expect. Residential price derivatives, which are commonly used by institutional investors, are also implying a fall of between 25 and 30 per cent. Meanwhile Tradition, an interdealer broker, says that the average UK house price is expected to fall to £153,591 next year and to £137,233 in the next three years.

Posted by little professor @ 08:37 AM (1383 views)
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11 thoughts on “Follow the money

  • Spread betting platforms were predicting 15% drops this year before just about anyone in 2007. They have been pretty accurate so far.

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  • Just had a look at spreadfair – mentioned in the article. The trading voumes on the housing market are tiny – hundreds of pounds. If you take the article at face value it should be possible to lock in to falls of 30% – but it isn’t. There is no market.

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  • Of course they are likely to be more accurate than the VIs, because if they werent the market would take them to where they should be. A backwardation on futures (which means a discount to cash – http://www.investorwords.com/382/backwardation.html) has implications. Mostly because most futures contracts going forward trade at a premium [well a bit of poetic licence here as im really talking about commodities rather than Financial Futures. Remember too these are nominal values- not adjusted for inflation.

    And if the VIs think this is rubbish – why dont they just sell the “cash”[properties themselves] and buy the futures?

    Good “spot” 😉 Paul!

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  • mark wadsworth says:

    £137k looks about right – this is about double what prices were in the last trough in 1995 – since then, with inflation and real wages growth = 5%, you’d expect prices to doouble over 14 years or so (1.05^14=about 2)

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  • tyrellcorporation says:

    I see a 30% drop by the end of 2009. We’re already seeing 1.5% a month and that’s before we go into the winter ‘dead-zone’.

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  • I see think it will be more. If lending practises return to 3 – 3.5 average wage multiples and the average wage is £25,000 with a 15-20% deposit the average house will cost £100,000 – £110,000 which is around a 40% drop, of course the overshoot will be more dramatic than that.

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  • Average wage = £25,000??? Depends on where you live. In East Anglia try £18/20,000.

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  • That should be ‘I still think’

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  • techie,

    The spread betting index isn’t perfect. In a normal spread-betting situation, if the price of the derivative (ie. the spread bet) gets out of line with the underlying share price then hedge funds can step in and use arbitrage to milk the difference. But because housing is illiquid, this can’t happen. So while the index is interesting, it’s far from being a perfect market.

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  • drewster – point taken! – I didnt read the article (bit busy) and hadnt seen Lucky Jims when i posted.

    You are right – i have said before on here that the problem with these indexes are that there is a fair bit of regional / type variation. IG does one for London and one for UK based on the deliverable of the HBOS index. Now in theory (because you can spread bet what you like ) there is no restriction to the amount of cash you could hedge. Having said that in my view the bid/offer (around 4%) spread makes the whole thing a bit lop sided away from the punter. The dec price for London though is 13 index points below sep which itself is 20 below june ( – yes i know i had to double check that myself). Im actually wondering if i missed something. Oh they are seasonally adjusted.

    Actually though if we do get some bulls on here their best bet is to buy some of the Dec – i would have thought. As i have said before its not like hedging a standardised product or commodity, its an issue of correalation as well as you rightly say liquidity in the able to convert to cash sense of the word.

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  • Maybe we should ask Krustie to just go away and buy some London IG HP futures rather than spout on about “London is different” “pent up demand” blah blah blah.

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