Hedging Against Property Market Decline

[BlowFish]

I asked this before a while back, and possibly this is not what James had in mind for this sections so apologies if that is the case.

I have a modest property portfolio (all UK based) that I don't want to unwind. I feel that further house price decline is on the cards and would like to minimise the effect of it. Can anyone suggest instruments or tactics to hedge against this decline?

Thanks,

[GammaJammer]

In very general terms (and to kick off the forum the right way) What I personally would do in your shoes is to try and break your overall risk portfolio down into it's component parts. That way you can seperate them into most likely 3 camps

1) Risks you can control and hedge accurately

2) Risks you can hedge roughly

3) Risks you have no control over

So what are the exact factors that would make house prices dip further?

An obvious one and good starting point is rate hikes. This probably falls into category 2 unless you have a really accurate model for forecasting just how much your portfolio will take a hit for say a 50bp hike by the BoE. But you can mitigate this risk via interest rate derivatives.

Second one - general housing market sentiment. V hard to control, but maybe a proxy can be achieved by constructing a short basket of UK housebuilders? Or even having a SB position on that sector?

I'm sure there are otehr factors, but it's not cut and dried what to do. Hopefully this acts as a pointer though.

make sense?

GJ

[aidaweb01]

You could short the 'UK House Price' or 'London Property price' Index found on some spreadbetting sites.

[BlowFish]

GJ, yes that makes very good sense - it had not occurred to me to think of things in that way. Aidaweb - thanks for jogging my mind, I thought I had heard of an 'instrument' that tracked some sort of house price index. I wonder how the spread betters lay off there risk if it's not an index that is actually traded?

EDIT: Incidentally I am surprised that this is not a fairly common requirement.

[GammaJammer]

Originally Posted by BlowFish GJ, yes that makes very good sense - it had not occurred to me to think of things in that way.

Very welcome. This is pretty much the essence of portfolio risk management

Originally Posted by BlowFish Aidaweb - thanks for jogging my mind, I thought I had heard of an 'instrument' that tracked some sort of house price index. I wonder how the spread betters lay off there risk if it's not an index that is actually traded?

At a guess (and it is a guess, but an educated one) otc economic derivatives. Probably a bank will make a market in this stuff. Goldies and Deutsche launched this kind of thing for NFP a few years back and it did well. Have a feeling it's even exchange traded now but don't quote me on that.

GJ

[aidaweb01]

Originally Posted by BlowFish Aidaweb - thanks for jogging my mind, I thought I had heard of an 'instrument' that tracked some sort of house price index. I wonder how the spread betters lay off there risk if it's not an index that is actually traded? EDIT: Incidentally I am surprised that this is not a fairly common requirement.

The instruments I am aware of track either Rightmove or HBOS House Price Index. Its a synthetic product thats not exchange traded (some people have issues with this) but in my experience it accurately tracks the respective indexes. The issue is in the spread which can be quite large, but if you are hedging with a 6-12mth+ timeframe then it's workable.

Not sure I understand your question about laying off the risk?

I have friends who own very sizable property portfolios in London and I was surprised how little interest they had in the concept of locking in their current profits by hedging. One guy in particular says he's in it for the long long term and is going to ride the 'dip' and not complicate his business by introducing concepts he doesn't understand.

[BlowFish]

Re laying off risk this quote from http://www.financial-spread-betting....d-betting.html puts it better than I could.

A pretty clear picture of a decisive shift in sentiment is emerging. John Austin, head of proprietary products at IG Index, says that because of this the firm's house price markets are currently suspended and it is only accepting bets to close existing positions. 'There has been such a run of stories in the press talking of meltdown in the housing market that the volume of sell-side business left us with no choice but to close our book to new business for the time being,' he explains.

The problem is that there is no easy way for spread betting companies quoting these products to actually hedge their exposure to the house price index. The flipside is that there is a huge degree of interest in these bets. 'We are very eager to get back into the house price market,' acknowledges Austin. 'We have a large exposure to the prices next March and would anticipate that once these figures have been released and the bets settled we will be back taking new positions again,' he adds.

[GammaJammer]

Originally Posted by BlowFish The problem is that there is no easy way for spread betting companies quoting these products to actually hedge their exposure to the house price index. The flipside is that there is a huge degree of interest in these bets. 'We are very eager to get back into the house price market,' acknowledges Austin. 'We have a large exposure to the prices next March and would anticipate that once these figures have been released and the bets settled we will be back taking new positions again,' he adds.

Fine - just mark the price way lower if you're long and worried. P*ssies. That's market making. They just don't like the money if it aint easy.

[aidaweb01]

Originally Posted by BlowFish The problem is that there is no easy way for spread betting companies quoting these products to actually hedge their exposure to the house price index. The flipside is that there is a huge degree of interest in these bets. 'We are very eager to get back into the house price market,' acknowledges Austin. 'We have a large exposure to the prices next March and would anticipate that once these figures have been released and the bets settled we will be back taking new positions again,' he adds.

I've just been into my IG account and it looks like I can go short.

That aside, I totally agree with GJ, making a market when it suits should be outlawed! When Ladbrokes first started offering books they were well known to 'investigate and offer a price' on anything (within legal and ethical boundaries) Thats how they made their name. If IG pull the plug on loss making products they'll quickly lose ground to a companies that don't! P*ssies indeed!

[atto]

Originally Posted by GammaJammer Fine - just mark the price way lower if you're long and worried. P*ssies. That's market making. They just don't like the money if it aint easy.

Yeah, that doesn't make much sense. I've never heard of a bookie shutting down a line because of overwhelming bets on one side.. just change the line (even if you have to change it a lot), and it will balance.