Trading the Housing Market

The Sub Prime problem arrived in an economy growing at over 3%. It is disturbing to speculate what will happen to the substantially weakened banks if there is a long recession and the vast bulk of medium rated mortgage risk and possibly even the huge Junk bond market come under, not just the current valuation problems but also, pressure from actual defaults.

Whilst many home owners are clearly concerned about falling house prices there are a few interesting options out there both for investors and home owners who want to hedge against falls in the housing market.

Spread betting firms like IG Index now offer markets on the Average UK House Price. Of course with any such speculation there are risks. However, trading the Housing Market is an interesting option.

Sentiment is now falling and whilst mortgage approvals have been suffering this is not the end (or even beginning) of the story. Viewings and enquiries at Estate Agents have been recording ever lower numbers. The mortgage offer is generally one of the last factors in a house purchase, first comes the hunt.

The real test will come if the employment outlook begins to seriously weaken. It must be something of a worry to policy makers that the current anguish is being felt when we have virtually full employment. What on earth will happen if (when) large numbers of high earning jobs start to be lost? Whilst people outside of the City of London like to smile at every misfortune felt by the absurdly overpaid bankers the fact is that in doing so they are laughing at themselves. Weakness in the City would mean an ever widening circle of misery.

Looking at the housing market from a slightly different angle, Simon Denham of Financial Spreads recently commented on the current high cost of mortgages, “The ridiculous requirement for banks to mark to market every single asset they hold is playing havoc. Most investments are in very liquid easily priced holdings eg stocks, government bonds, cash etc. However many are in completely illiquid and still perfectly secure assets eg mortgage bonds, property etc. How do you value a product which has good solid worth but for which, temporarily, there is no buyer? Many are being forced to revalue at ruinous levels simply because the auditors, fearful of their own backs, are insisting that this is prudent. None of them would ever dream of selling at these valuation levels but this is academic.

“It is this ‘mark to market’ requirement that is likely to hold back recovery. As soon as a mortgage is awarded the lender may have to mark the loan immediately at a substantial loss. You can understand the lender’s reluctance.”

It is easy to let the current slowdown in housing to assume crisis proportions in many investors’ minds. However, in reality, a year ago it would have been difficult to find anyone who thought that prices were anything other than over heated. A period of cooling or at least stagnation is probably well overdue. Unfortunately, given that we live in a country where for many people the value of their house defines their wealth, it is easy for any slowdown to affect the national psyche. If we enter a five year slump as per 1989 to 1994 then the economy will find it very difficult to ignore.

Note that spread betting on UK House Prices like other forms of spread betting carries a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.