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UK House Price Futures Market Confirms Sharp Fall in House Prices During 2008

Housing-Market / UK Housing Apr 20, 2008 - 12:25 AM GMT

By: Nadeem_Walayat

Housing-Market

Best Financial Markets Analysis ArticleThe UK House price futures market has been in existence for some 10 years now and is based on the Halifax House Price Index data. The market is managed by IG Index and operates under the principle of a spread betting market maker.

Current IG Index quotes against actual published Halifax Index data :


Maturing Month House Price Quote % Price Drop (Dec07)
Dec 07 - Actual
196.72
 
March - Actual
194.83
-1%
June 2008
181.9 - 184.9
- 6.7%
Sept 08
172.6 - 176.2
-12%
Dec 08
No Quote
 

 

Should I Short House Price Futures Now ?

The simple answer is No

Clearly the prices quoted by IG Index are overly bearish and therefore unlikely be matched by the actual index on settlement.

Also, bare in mind that quotes for 2 or 3 quarters out for the housing market are insufficient for multi-year positions, even if house prices fall by 10% a year as the wide buy / sell spread of 3 (1.6%) plus the position rollover to each new quarter being marked down would take a large slice of any actual house price falls which may even mean result in a losing position after several such rollovers. The only winner here is IG Index, unless your brave enough to buy the futures on anticipation of a narrowing in the spread between futures and cash on settlement. I.e. if you bought Sept 08 at 176.2 and house prices settled at 182.2, then you would make a profit of 6 or £6000 at the £1000 per point minimum position size.

The best time to actually trade is at market junctures, i.e. back in August 2007 when I first posted our forecast for House Prices to fall by 15% over 2 years. Would have been the best time to open a position as the indices were still discounting house price gains (in contango), therefore over subsequent months the market has seen a shift in sentiment from bullish to bearish i.e. from expectations of a rise of 10% to discounting a fall of more than 10% (backwardation). Therefore the speculator could have taken advantage of that switch in market sentiment of as much as 25% in a relatively short space of time, which net of spread and rollover costs could have generated a profit of as much as 20%. or £38,000 at £1000 per point.

The next opportunity will clearly exist when there is another switch in sentiment from bearish to bullish, however I do not see that on the horizon for the duration of the current 2 year forecast. Though a good bought of inflation would reduce nominal falls in house prices and therefore future quotes say during late 2009 for 2010 may become overly bearish.

For the most recent analysis of house price expectations see - Housing Market Worst Since 1978- Heading for April Apocalypse? (16th April 08).

The below graph illustrates the trend expectations.

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Simon Smith
20 Apr 08, 02:33
House price derivatives

If you would like to look at more long term indicator of where derivatives trading on UK house prices is placed, then there is a market at www.spreadfair.com.

Also this market trades in much larger sizes than the IG Index one. So it is likely to show a more considered picture of what traders expect to happen.


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