The bears on the UK property market are becoming less nervous as investors begin to price in the positive impact on property prices of lower interest rates. In some regions, most notably Wales and Scotland, the bulls now outnumber the bears, according to the latest odds from spread betting companies.
The sharpest turnaround in recent months has been in Wales. Back in May, spread betters were pricing in modest price falls of 2.1 per cent by March next year for Welsh property prices. These same betters are now predicting the Welsh property market will have risen by 0.6 per cent by March 2006.
In Scotland, clients of IG Index, one of the UK’s biggest spread betting companies, are predicting the average house price will have risen 2.1 per cent to £109,500 by March next year. And by June, the typical Scottish house is expected to be worth £112,000, 4.4 per cent up on current prices.
Across the UK market as a whole, spread betters have become more optimistic on property prices, partly because markets had in recent weeks been pricing in interest rate cuts of half a percentage point or more.
But Pete McDermott, head of options at IG Index, says the more positive outlook is mainly down to significant numbers ofproperty bears exiting the spread betting market.
“Our clients think house prices have stabilised a bit,” he says. “Three or four months ago people were closing their positions and many were forced to swallow moderate losses as the downturn in reality was not as bad as had been predicted. But there is still an innate bent to go short on the market as most people are long on property already.”
This mildly more optimistic outlook comes as the number of people registering as potential home-buyers with estate agents rose for the second month in a row in July. The Royal Institution of Chartered Surveyors has said that buyers’ interest appears to have been revived. Sales rose in July after four months of stagnation and were just 18 per cent down on the same period last year.
Martin Ellis, chief economist at the Halifax, is predicting its measure of house prices will record a rise of just 2 per cent across the UK this year. With virtually no change in UK house prices since the beginning of the year, this means the Halifax is expecting a mild rebound in the second half.
Halifax’s price index, which forms the basis for all the large spread betting companies in the market, is calculated on the back of actual prices paid for properties based on about 15,000 transactions a month. The bank takes into account the size and quality of properties in calculating its indices.
Despite the slight improvement in sentiment towards property prices, the overall outlook remains one of mild doom and gloom. By March next year the value of a typical house across the UK, as measured by Halifax house price indices, will be £158,800, down 2.3 per cent on current prices, according to IG Index.
One region where spread betters have become more pessimistic is the South West where they are now pricing in falls of 3.7 per cent by June next year. This would take the average price of a home in the the region to £178,200. Only three weeks ago, these same investors had been pricing in falls to about £182,400.
There are now three different spread betting companies taking bets on property prices. IG Index (www.igindex.com) offers the most extensive betting options, allowing investors to take punts on the 11 different regions covered by Halifax indices as well as the UK as a whole. The others, Cantor (www.cantorspreadfair.com) and Betfair (www.betfair.com), tend to concentrate on London and national house prices.
If you are interested in taking a punt on house prices you have to decide whether to go “long” (meaning you stand to gain financially if house prices rise) or go “short” (meaning you should make money if house prices fall). There is normally a difference between the short and long prices that widens the more you punt.
Take the current prices offered on Greater London by IG Index. Its spread for prices for March 2006 is 233.4 to 236.6 (representing property prices of £233,400 and £236,600 respectively).
On a relatively small “short” bet of, say, £200 per point, if the average London house price as recorded by Halifax fell below £233,400 by March 2006, you would be in the money. For each £1,000 prices were below this level, you would gain £200.
But what if you want to lock in the value on your current property? Say you own a house worth £465,000 and you wish to protect yourself from any downturn in the property market. Given a house of this value is about double the average for Greater London, you would need to take out a “short” bet at £2,000 per point (as each point represents £1,000 in property prices).
On a larger bet of this size, the spread between long and short prices widens. Pete McDermott at ING Index estimates a £2,000 per point bet would secure an inferior short price of about 228. Therefore only if Greater London house prices fell below £228,000 by March would you stand to make any money. And, of course, on a £2,000 per point bet, if house prices fell to just £230,000 by March you would be out of pocket by £4,000.
If you do decide to take a punt on house prices, bear in mind that if Halifax house price indices move dramatically in the opposite direction to your punt, your losses could spiral out of control. And if you are looking to go short on the market to lock in value in your current home, remember there is no guarantee that your property will move in line with the Halifax house price index. Even if the market tanks, there will almost certainly be houses and flats in certain hotspots that continue to climb in value.
