Thursday, November 12, 2009

Pile in

Bonds that invest in rising house prices

Abbey and Britannia Building Society have launched new bonds, offering 50% of the growth in the Halifax house price index over the next five years. Investors have until Saturday to invest in the Guaranteed Growth Plan Issue 26 from Abbey, which offers 50% growth in the index over five years or a guaranteed minimum payment of 11%, whichever is larger. The Britannia product is available until 24 November and offers 50% growth in the index or a 10% payment over five years.

Posted by little professor @ 02:14 PM (1471 views)
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13 thoughts on “Pile in

  • 11% guaranteed over 5.5 years == 1.9% p.a.
    or 0.5 * house price rate if greater…
    sounds like a great way for Abbey et al to hedge their exposure to housing.

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  • mark wadsworth says:

    What 666 says. If prices go up, banks can heave sigh of relief and have to write off less of the mortgages they have made. If prices go down, banks can heave sigh of relief as they can get away with paying 2% a year simple interest (10% divided by 5 years).

    This was one of the wizard wheezed dreamed up by Arc Capital & Income plc, who are now in adminstration and under investigation from FSA (horse, bolts, stable doors etc).

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  • These structured bonds are always a bad idea. Similar ones exist for the stockmarket (e.g. 20% of FTSE rise, or your money back). The catch is mainly that they exclude dividends.

    This bond looks like a lose-lose-lose. If house prices go up, you’re left behind (by 50%). If house prices fall, you get a measly 1.9% p.a. return. If house prices plummet for 3 years then rise for 2 years, ending up back where they were, then you’ve missed your chance to buy because your cash was locked up for 5 years.

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  • stillthinking says:

    This is self-defeating. The people who pile into property see gains because of their collective piling into property, if they just buy these bonds instead then there won’t be the same effect on prices. The more popular these bonds become the less they will pay out.

    Really, this is a great idea and might reduce the amount the taxpayer has to cough up and also reduce house prices by sucking up cash otherwise directed at property.

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  • What ever happends, the holder is on the wrong side of this transaction. No suprise there then. I’m sticking (no pun inended)
    to old Empire stamps. That index has gone balistic, and it’s a great inflation hedge too. They weigh a lot less than gold bars.

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  • Another great service to customers of UK banks.
    Well and truly serviced

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  • The majority of investors opting for this type of scheme will likely be retired or 50+ with cash on deposit and disappointed with the current interest rates. They will often be homeowners and will seek capital security. As drewster points out there is a feast of structured product on the market linked to various indices – this is nothing new and indeed I saw some people do very well from a Newcastle BS tranche launched several years back.

    3 things strike me

    (1) Railroading by Bank advisers
    (2) Little prospect of any real upside
    (3) Counterparty risk

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  • You guys made short work of that. Love it

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  • jack c,

    What happened with that Newcastle BS tranche? Which index was it linked to?

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  • 50% is the killer.
    I’ve had Newcastle type scheme before and made a mint, 2002 – 2007 mind you

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  • drewster – The tranche I’m referring to simply tracked the Halifax house price index and matured about 2 years ago – £10k in came out at about £17k (net for basic rate Tax payer) – so lots of people were more than happy. I cant personally see past returns being repeated as I do not expect the index to surge ahead as it has in the past (infact I expect it to turn negative again – particularly once we hit mid 2010)

    Hope this helps

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  • fallingbuzzard says:

    That sounds like a Heads I win, tails you lose deal for Abbey

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  • general congreve says:

    Doomwatch @5: Great idea, one word of caution though, flammable.

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