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UK Property Derivatives - Understanding & Using them

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UK Property Derivatives - Understanding & Using them

An easier, less hassled way to "play" UK property ? :: Link here: http://tinyurl.com/ukprop-D

==================================================================

 

(I will pull the relevant parts off the earlier thread, and post them here)

The UK Property Prediction Challenge : Up or Down?

In a bit of silly Bravado, I issued a challenge...

 

I am starting to wonder if we don't start to get a 2-speed property market now, where desirable properties in good areas just stop falling but BTL crap keeps on getting hammered as repos hit the market. Buy-to-livers aren't going to become forced sellers anytime soon imo.

I have heard that before - But I dont believe it.

Here's why:

London is depopulating.

Despite the nonsense written in today's Natiowide B./S. report about Housing Demand

rising at 153,000 per annum (out to 2031 - give me a break!) versus only 100,000 new houses

being built, I think that the UK and London in particular is going to suffer a BUST in demand.

If the jobs arent created, the population wont be there. People will go somewhere that they

can find work - and it will not be London- maybe not the rest of the UK either.

 

BTW, If you think I am speaking nonsense, then let's see if you can do any better.

So how about a property forecasting competition ??

Challenge was Issued Here: http://www.housepricecrash.co.uk/forum/ind...21312&st=15

 

1249026290065058400.jpg

 

HISTORICAL PROPERTY PRICE DATA +++

Mo'Yr Hali.ns Na'wide M Ave.H&N AveHN AyoY%

Peak 201,081 186,044 P 192,490 (was Q3.2007)

 

Dec'6 183,645 173,746 D 178,696 -0.82% 9.40%

Mar'7 193,180 177,083 M 185,132 1.75% 10.24%

Jun'7 199,458 184,070 J 191,764 0.70% 11.23%

Sep'7 200,168 184,723 S 192,446 -0.02% 9.09%

Dec'7 195,333 182,080 D 188,707 -0.25% 5.60%

Mar'8 190,619 179,110 M 184,865 -0.83% -0.14%

Jun'8 181,765 172,415 J 177,090 -1.63% -7.65%

Sep'8 173,350 161,797 S 167,574 -1.45% -12.92%

Dec'8 158,437 153,048 D 155,743 -3.05% -17.47%

===

Jan'9 159,818 150,501 9 155,160 -0.37% -16.52%

Feb'9 159,208 147,746 F 153,477 -1.08% -17.66%

Mar'9 157,066 150,946 M 154,006 0.34% -16.69%

Apr'9 157,156 151,861 A 154,509 0.33% -16.37%

May'9 160,869 154,016 M 157,443 1.90% -12.55%

Jun'9 158,807 156,442 J 157,625 0.12% -10.99%

Jul'9 15x,xxx 158,871 J 15x,xxx

. . .

Top : -21.02% -15.91% : 22mos -18.11% (vs.June)

Peak 201,081 186,044 P 192,490 (was Q3.2007)

 

= = = = =

LINKS:

====

Wiki on Property Derivs.. :: http://en.wikipedia.org/wiki/Property_derivatives

GFI Property Derivatives :: http://www.gfigroup.com/markets/commoditie...erivatives.aspx

SPREFS prp-d Newsletter :: http://www.sprefs.com/index.php?page_id=169

Tradition's Trading Desk. :: http://www.thehousingdesk.com/

UK/Europe PropD. Notes. :: http://housingderivatives.typepad.com/hous...tives/ukeurope/

Tradition US Prop. Derivs :: http://housingderivatives.typepad.com/hous...roperty-uk.html

Getting into Prop. Derivs :: http://sites.google.com/site/pdigdraft/get...?attredirects=0

Prop Derivs for FTB-ers. :: http://www.housepricecrash.co.uk/forum/ind...howtopic=126490

 

L.T. UK Property Prices... :: http://www.greenenergyinvestors.com/index.php?showtopic=6925

 

Tags: uk property derivatives, halifax swaps, property price risk, property-linked

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(From the SPREF / Tradition newsletters)

 

Old chart, before futures prices really crashed to below Pds.110,000

Data_1.gif

 

Property Forward Prices

Forward residential levels were unchanged to slightly off during June as the upward re-alignment of the curve

paused. The average UK house is currently £160,869, that same house is worth £143,173 by 2011 and begins

to recover to £148,804 by 2013.

 

=====: HPI NSA : -1 year- : -4 year- :-Longest- // BDEV : MtgAprv

Dec-06: 183,645 : 20x,xxx : 20x,xxx : NotAvail // 1235.0 : 115.00

Mar-07: 193,180 : 20x,xxx : 20x,xxx : NotAvail // 1105.0 : 114.00

July-07: 200,578 : 20x,xxx : 20x,xxx : NotAvail // 935.00 : 112.00

Aug-07: 201,081 : 198,572 : 205,592 : NotAvail // 928.50 : 106.00

Sep-07 : 200,168 : 195,164 : 199,167 : 327,275 // 748.00 : 100.00

Oct-07 : 197,817 : 195,164 : 191,160 : 311,261 // 652.50 : 89,000

Nov-07 : 194,258 : 183,970 : 183,970 : 397,612 // 465.25 : 83,000

Dec-07 : 195,333 : 174,823 : 178,730 : 389,689 // 455.50 : 72,000

Jan-08 : 191,275 : 169,278 : 173,104 : 381,594 // 422.00 : 73,000

Feb-08 : 193,448 : 176,929 : 174,060 : 381,594 // 422.50 : 72,000

Mar-08 : 190,619 : 176,323 : 168,698 : 495,609 // 413.50 : 64,000

Apr-08 : 190,952 : 163,264 : 158,490 : 473,561 // 275.25 : 58,000

May-08: 186,482 : 165,173 : 154,671 : 469,561 // 182.50 : 42,000

=====: HPI NSA : -1 year- : -3 year- : -5 year- // BDEV.L : MtgAprv

Jun.-08: 181,765 : 157,577 : 142,659 : 153,848 // 058.00 : 36,000

July-08: 178,440 : 153,591 : 137,233 : 153,591 // 095.00 : 33,000

Aug-08: 178,408 : 140,075 : 150,782 : 150,782 // 147.00 : 32,000

Sep-08: 173,350 : 144,712 : 138,572 : 145,589 // 104.75 : 33,000

Oct-08 : 168,158 : 134,346 : 117,011 : 128,279 // 077.00 : 32,000

Nov-08: 162,848 : 123,764 : 109,108 : 119,693 // 046.25 : 27,000

Dec-08: 158,437 : 126,750 : 109,322 : 124,075 // 070.00 : 31,000

Jan-09 : 159,818 : 127,854 : 110,274 : 115,069 // 069.50 : 31,000

Feb-09 : 159,208 : 128,258 : 111,873 : 119,864 // 085.50 : 37,937

Mar-09 : 157,066 : 125,774 : 117,814 : 124,182 // 088.75 : 39,230

Apr.-09 : 157,156 : 127,296 : 125,725 : 130,439 // 140.50 : 43,201

May-09 : 160,869 : 148,804 : 144,782 : 150,413 // 158.50 : 43,414

Jun.-09 : 158,807 : 147,195 : 143,173 : 148,804 // 147.50 :

July-09 : 160-,xxx : ???-,??? : ???-,??? : ???-,??? // 198.50 :

 

The next Halifax HPI is due out by 10th July latest whereupon the forward prices will reset.

/see: http://www.sprefs.com/index.php?page_id=169

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In JUNE 2008, property futures were already highly Bearish

 

Monday, June 9, 2008

UK: Property Futures Say Housing Prices to Fall 50% in Real Terms

 

So many bad numbers have come out about residential real estate that they all begin to blend together. But a figure as grim as "50% decline", applied to an entire market, even if in real rather than nominal terms, is a stunner.

 

This grim forecast for UK real estate comes from a futures index based on the Halifax monthly house price index. Since the monthly Halifax report released last Friday was considerably worse than expected, it's possible that the market has overshot, particularly if it is thinly traded. But the trajectory of US housing is proving to be far worse than most had estimated initially, and UK investors are no doubt mindful of our bad example, so the price of the futures may well represent the current consensus among professionals.

 

From the Guardian:

 

The slide in house prices will continue for at least three years and crush the value of a home by almost 50% in real terms, according to a key index of property price futures. Indications from futures trading on long term property prices shows that the average UK home will recover its current value only in 2017.

 

By the end of this year prices will be down by 10% and by a further 10.5% in 2009, according to the index. Prices will keep dropping through 2010 and cut values by 23.5% when they hit rock bottom in 2011. House prices will then begin a slow climb back to current market values over a period of about six years.

 

If an average retail price inflation rate of 4% is included in the calculation and in addition the 8% drop in prices over the last eight months already registered by the Halifax index, the fall in values over almost four years will reach 47.5% in real terms.

 

The Liberal Democrat Treasury spokesman, Lord Oakeshott, said the figures revealed that property investors had little confidence in the market and were predicting steep and prolonged falls in prices.

 

"This government says this housing depression will be different from the early 1990s. Yes, that's right. It will be worse."

 

/more: http://www.nakedcapitalism.com/2008/06/uk-...ing-prices.html

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For those following here, here are the prices as per end June (see attachment).

 

I'm happy to buy the 1yr, the 3yr or the 5yr in say 5p per pound if you like, so if prices relative to those forwards are 20k higher, you owe me 1k. Same the other way round if prices are lower.

From the document:

======

HPI NSA : May.-09 : June-09 : Change

INDEX-- : 160,895 : 158,807 : - 2,088

1 year :: 148,828 : 146,896 : - 1,932

3 Year :: 144,806 : 142,132 : - 2,674

5 Year :: 150,437 : 142,926 : - 7,511

Tradition, dated 10.July 2009

 

Have you any idea of what the current price is?

 

As a trader, I would want to see what impact the NW index data would have on the market.

If it put the futures high enough, I would consider shorting it.

 

If not, I might wait for a confirmation from my Builders Bellwether index, that that particular

indicator was right. Else there might be better shorts to make - like BDEV itself

 

As I said, I dont want to trade on Old prices, especially since the "bounce is still officially alive" in my view.

 

I can't sadly, because it's a market for professionals and I can't get access. I understand your concern but given that the futures sold off between May & June I can assure you they are quite dislocated from spot market moves. We can wait til the new ones come out around 10th Aug and do it based off that if you like?

 

Maybe, I can/will send an email to Tradition later, and see if I can get an update from them.

 

Spline must be getting prices from somewhere, to make this update on his website:

khp_jun2009.png

/source: http://www.houseprices.uk.net/articles/hou...rice_predictor/

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Property Derivatives - First Half Slowdown

 

First quarter derivatives trading volumes reveal reduced activity

 

posted ‎‎May 25, 2009 4:43 PM‎‎ by Colin Barber

 

London. 1st May, 2009: The total volume of IPD Index Property Derivatives traded over the first quarter of 2009 were the lowest first quarter figures for three years, at just £606m, according to data released today by IPD. Since the rapid growth of derivatives trading from 2007, first quarter volumes have proved the year’s most active period – in Q1 2008, trading volumes were £3.7bn, while over the same period a year earlier £3.3bn worth of property derivatives were executed. This annual spike in first quarter activity is due in part to the preference of full calendar year pricing among traders.

 

This year, a total of 156 trades were executed over Q1, while the average outstanding deal size fell to £8m, from £9m in the fourth quarter of 2008. In the UK, significantly still the most mature property derivatives market, the total notional value of deals completed stood at £554m, compared to £979m last quarter and £3.4bn over the same period last year.

 

The French and German derivatives markets both saw significant 1falls in trading volumes compared to both the previous quarter and Q1 last year. There were just 7 French trades worth £51m and 1 German trade. Annual trading volumes for France were £319m in 56 trades, while Germany recorded £143m in 34 trades.

 

The aggregate total value of trades executed on the IPD suite of indices since recording began in Q4 2004 now stands at £22bn, over 2105 trades. The outstanding notional amount is now £9.4bn.

 

/see: http://sites.google.com/site/pdigdraft/Home/news

 

== ==

 

Things looked pretty grim back in Jan. 2009 apparently:

 

Derivatives Show UK Home Prices To Halve

 

Two stories in the UK press highlight the falling prices for homes in the UK:

 

Daily Express December 30, 2008:

http://housingderivatives.typepad.com/hous...s-to-halve.html

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Trying to get a live update from the geez who trades it at my old shop.

 

I think we have a Property Derivatives man who is a GEI member,

I will send him a PM later/ Or maybe he can PM me, if he sees this

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From the document:

======

HPI NSA : May.-09 : June-09 : Change

INDEX-- : 160,895 : 158,807 : - 2,088

1 year :: 148,828 : 146,896 : - 1,932

3 Year :: 144,806 : 142,132 : - 2,674

5 Year :: 150,437 : 142,926 : - 7,511

 

Tradition, dated 10.July 2009

 

Tradition seems to be the Main (sole?) broker for the Halifax-linked derivatives

 

UK/European Residential Property:

TFS brokers residential swaps based on Halifax and other residential indices.

 

TFS Property UK Partners:

TFS Property partners the following companies in property markets:

 

+ http://www.struttandparker.com

+ http://www.sprefs.com

 

UK/EU: Peter Sceats

Phone: +44.207.796.1514

Fax: +44 207 796 0444

peter.sceats@tfsbrokers.com

 

UK/EU: Paulo Gomes/Kevin Adams

Phone: +44.207.796.1510

Fax: +44 207 796 0444

property@tfsbrokers.com

 

/see: http://www.thehousingdesk.com/

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Rescue Me ... By Peter Sceats

 

March 31st saw the “Rescuing The Housing Market” public debate at the British Academy.

 

Speakers/Panel members were Professor Susan Smith FBA Institute of Advanced Study University of Durham, Professor Christine Whitehead OBE London School of Economics & University of Cambridge, Professor Gavin Wood RMIT University Melbourne, Mark Stephens of Glasgow University and myself. The event was attended by the public, academics, journalists and government representatives. Fascinating stuff. A complete rainbow of ideas of which property derivatives now has a place. A film of the event will be on the http://www.BritAc.Co.Uk website at some point.

 

Sadly, what wont be published on the website are the conversations over wine and cheese on sticks afterward. Apparently, to around 5% of the audience I am personally responsible for the sub-prime mortgage crisis and consequential global meltdown and I also ruined the oil market. Duh? The whole “derivatives as a risk mitigation tool” thing not quite getting through yet, then.

 

/see: http://www.sprefs.com/UserFiles/Apr-09.pdf

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Derivative trade suggests early house price recovery

 

By Daniel Thomas .. July 24 2009

 

Improving investor sentiment in the property sector has led to a surge in prices for derivatives.

 

Traders say the pricing curve for commercial and residential markets has rallied in the past few months, mainly because the fall in physical property assets appears to be slowing, or even stabilising, after a two-year decline.

 

Derivatives prices could even be understating future market declines, having bounced from a very negative position at the start of the year, analysts say.

 

Trading volumes have remained subdued, with most activity in the UK, although French offices and US real estate have also been in focus.

 

The biggest price moves have been in the residential market. Derivatives trading based on the Halifax index suggests that the UK market will fall 29 per cent from peak to trough, whereas earlier this year the drop was expected to be 45 per cent. The index is down a f i f th from the August 2007 high.

 

In March, derivatives were implying that returning to current prices would take 10 years. This has been reduced to seven years.

 

The 1.9 per cent fall in prices in the second quarter was the smallest quarterly fall since the first quarter of 2008, which shows that the underlying pace of house price declines is easing.

 

Analysts point to improvements in affordability, low interest rates and the shortage of properties for sale.

 

The effect has fed through to derivatives pricing.

 

This year, trading suggests that prices will decline just 7 per cent, more than half of what was being factored in a few months ago, with a slightly negative market for 2010 and modest increases of about 2 per cent in 2011.

 

Interest in specialist investment instruments based on future pricing has also picked up. Phi l lip Ljubic, property derivatives trader at Royal Bank of Scotland, said there had been a surge in demand for capital protected notes, which provide exposure to the UK residential market.

 

"These are nice products as some people think that the market could jump and can benefit from the upside if it does occur, while being fully protected if residential prices happen to move down," he said.

 

Commercial property has witnessed similar optimism.

 

Rob Atkin, head of property derivatives at Tullett Prebon, said the market was looking attractive from a hedging perspective given expectations that capital declines could be worse than prices indicate. "There are people out there who could benefit hugely by hedging their positions and locking in the returns for next year." Derivatives suggest that UK commercial property prices will fall 17.5 per cent in 2009, against previous expectations of up to 26 per cent. They also suggest prices will fall just 3 per cent in 2010, compared with of 9 per cent previously.

 

Overseas markets have attracted more interest, the US sector in particular.

 

Pricing has been relatively static, however, with commercial property showing a decline of about 20 per cent in total returns this year and a further 4.5 per cent next year.

 

/see: http://www.ft.com/cms/s/0/9de498bc-78b1-11...?nclick_check=1

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Did You Make a Huge Profit Out Of the Property Bears When We Suggested?

 

Stuart Law - 24th July 2009

 

It is always nice to be right and even better to make huge profits from it.

 

In our blog entry back in February ( investors.assetz.co.uk/blog/?postid=128 ) we pointed out that the property derivatives market was producing what was effectively a false price due to property bears betting on house prices collapsing but with few people betting on house prices rising creating a balanced pricing for these property derivatives based upon supply and demand but a completely false picture of where the market was going.

 

What we said then was:

"A very interesting set of data to look at is the Tradition house price index derivative based upon the Halifax house Price index. Unbelievably, it is indicating that house prices will fall 45% from their peak by three years time. It is indicating a 20% drop this year. Our forecast is for 5% fall overall this calendar year with monthly growth having started again by the summer. The problem with the derivatives market, and Tradition would confirm this, is that it is being used to hedge exposure and is very much a one-sided market. I know that markets can't really be one-sided as such in that you need buyers and sellers but the people trying to hedge their exposure to the residential market are willing to let you take them up on a bet the house prices fall 45% from their peak by three years time. With interest rates as they are, mortgage lending beginning to increase and the recession a distant memory in all likelihood in three years time it doesn't take a rocket scientist to work out that that these hedging requests by institutions are probably wrong. If you feel this quote is wrong too then take a position because the profits would be huge if you did. ( www.tfsbrokers.com/pdf/RISK&MANAGE/2009/Jan-09.pdf )"

 

We were quoted in Page three of that newsletter as calling the derivatives market and pointing out the huge pricing fault.

 

Well, property derivatives prices have moved very sharply back exactly as we forecast as the property bears realised they were highly exposed and property bulls took advantage and took their money at these ridiculous price levels. Effectively the property bears had placed an enormous short against the market at completely incorrect pricing and have lost their shirts in the market rebound.

 

The Financial Times story this morning confirms what has happened - www.ft.com/cms/s/0/a7acd2dc-77a9-11de-9713-00144feabdc0,s01=1.html

 

I hope you have been taking advantage of this situation either by buying into this property derivatives market directly or investing in property at very heavily discounted prices from depressed sellers. You won't be seeing those ridiculous price fall projections again from anybody who is willing to bet with a cheque book. You're only now going to see negative comments from those who talk and don't act, who scaremonger but don't invest (or short).

 

Stuart Law: http://news.assetz.co.uk/articles/4905.html

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SOME OLD COMMENTS ... about the usefulness of Property Derivatives...

 

QUOTE(DrBubb @ Oct 10 2005

FF,

Good comments, and here' s key part:

"the more you try to overcome cross hedge basis risk the more likely you are to have liquidity problems on individual products."

 

EXACTLY.

If you had a different index for each Postal Code, or each street, it would be great. But there would be zero liquidity, so you need to capture a big enough population of properties that there is regular trading, and wide interest in the index. But not so wide that the index does not effectively reflect what is happening to the value of an individual property.

 

Thus, a UK-wide index is probably not going to provide a good hedge for a London property, since London tends to lead by a year or so, and may show bigger swings.

= = =

 

"First, given the restrictions on short-selling a portfolio of houses, the standard futures and cash market arbitrage relationship would not be useful in pricing the NAHP index contract. Therefore, at any given point, market participants would have no mechanism for ensuring what would be �fair�� value of an NAHP contract"

 

I am not fully sure I know what this means...

But taking a stab at it: There is no way to go short an individual property the way that you can short a stock. In stocks, it is easy to borrow some shares, and sell the shares short. How do you borrow a house? And once you have sold a specific house, someone else owns it, so you would have to buy back that house to cover the short. Houses are not fungible, the way that share certificates are.

== ==

 

(2)

I have looked into the property derivatives market in some detail. The market is basically 'over the counter' only and only for big (exposure > �5) players. The other thing to notice is that the financial liability of each transaction is held be each counterparty. So the only people/ companies that can do anything in this market are the very big one with a AAA credit rating. This would probably explain why almost all the trades that have taken place so far are between the banks. Some big property companies (eg. British Land) have taken part, but so far this market is not serving a great deal of use for anyone.

 

I have been instrumental in creating the open order book spread bet market for residential house prices at www.spreadfair.com. This caters for smaller people that may want to hedge the exposure of their property portfolio, a new property development, or just their own home. Soon there will be markets added for residental property using the IPD index. Also an options market will be created so that participants can hedge their exposure to the downside, with a clearly defined and limited cost on the upside.

 

It will be interesting to see how this market evolves as it is in fact a web based futures market! Operating much like the markets provided by Liffe, but being more easily accessible to the average man on the street!

 

(3)

Hello DrBubb, Father Fred & other members,

 

I am also writing a thesis about property derivatives, more specific, I look at the possible applications of property derivatives ( PICs and Property TRS ) for fundmanagers and institional investors. I have read your discussion and I agree with the summary of market observer except his point about the statement that the only companies that can do transactions have to be AAA credit ratings. By a colleteral in the form of property, companies with a lower rating should be able to participate also in the PTRS market.

 

Does anyone has a comment on that?

 

I have another statement that I would like to discuss. When looked at the property magazines and press releases of companies in the field there is suggested that there are two separate markets; one for PIC and one for PTRS, in fact these markets are the same because the backend ( property sell side ) is structured as a PTRS with the PIC issuer who sells to property buyers. This means that there are not two markets with two volumes ( 1,4 billion and 1,9 billion ) but only one volume of 1,9 billion pounds of trades since 2005.

 

Does anyone have a comment on that?

 

As said I am doing a research about the possible applications of PTRS and PICs. If anyone is interested I would like to post some applications and I am curious if you see this as a real opportunity or just as a theoratical option with no feasibilty in �real live� due to other / better investment tools or regulatory problems.

 

I am also curious about the status of the research of father fred. If you are into a discussion about some topics I am interested. Propably we can share some insights.

 

I am looking forward to your reply,

 

Rick

 

== == / source: http://www.housepricecrash.co.uk/forum/ind...17066&st=30

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you can bet on London and UK house prices for Sep09 and Dec09 with Igindex...at £10/pt starting at 155.7 this morning for UK Hps..

(10/pt means £10 per thousand pounds movement in HPs)

Not very far into the future though.

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Here's the initial post from that old 2005 thread on HPC

SOME OLD COMMENTS ... about the usefulness of Property Derivatives...

QUOTE(DrBubb @ Oct 10 2005

(I WROTE THIS in response to an email about Property Derivatives):

 

I have written the Options chapter in a book on Derivatives. And I was once head of Commodity Derivatives at a large global bank.

 

PROBLEMS TO SOLVE,

to make a Property Derivatives Market viable

==============

 

We looked at Property Derivatives as a possible line of business. We identified two main problems:

 

+ "Basis Risk" : (Definition: the difference in price movements, between the Property index exployed in the derivative, and the specific Property valuey ou are looking to mimick.) The index used for settlement of the derivative must be meaningful for the transactions that you are trying to hedge. To put it another way, can I really hedge a 3BR House in Hammersmith, with a derivative linked to the Halifax Greater London index? The index employed, must also be what it is meant to be, else it is too risky. For example, there are problems with the method of calaculating the Halifax index, which may be obvious to you. In my opinion, it has a built-in bullish bias, and is tooi narrow. An additional issue is this: does a specific property in one location, relate closely enough to a index. You need a broad index to create interest from many parties, but if it is too broad, then the "basis risk" in relation to what you are trying to hedge will be huge,

 

+ Need for a two-sided market : Every trade must have a buyer and a seller. There are loads of people who will want to SELL a property derivative when the market is sliding. Because there are trillions of pounds value of property to hedge, there will always be someone who wants to sell. But who will BUY the derivative in a falling market? The best way around this problem is to issue property related bonds, with positive and negative linkages to a popular index. Then when the market is sliding, there may be some short covering to cushion a sharp fall.

 

The small number of Property hedges that exist are imperfect. If those offering them cannot manage their positions, they may suddenly shut down. IG INDEX stopped allowing two-way bets on its property index last year. I had a nice profit on some open short trades, and so I got caught by that. So the bugs are far from worked out, even now

 

= = = = = = = = = = =

Sidebar: on "Shorting"

For those of you who do not know what a "short" is, I will explain.

When you borrow a stock, and sell it, you gain if the stock falls, because you can buy it back more cheaply. But you are exposed to the risk that the stock (or index) will rise instead. If it rises, you will have to buy it back at a higher price. This can expose you to theoretical unlimited losses, if the stock goes to infinity.

 

In practice, I go "short" by purchasing "puts". A put is an option which is the opposite to a call.

With a put, you win on the downside, when the price falls. With a call, you win on the upside, when the price rises. To get this payoff, you pay an upfront sum called an option "premium". Your risk is limited to the premium. So for example, you might pay 100 points for a Dec. Put on FTSE struck at 5400. If FTSE rises, and clsoes above 5400, you lsoe the whole premium. If it falls to 5200, you would collect 200 points.

The cost of this insurance, depends upon the volatility that option sellers expect

= = = = = = = = = = = =

 

(I also had this exchange by email):

 

"You need LOTS of indices as you say. Residential, Commercial,

office, retail, luxury homes etc etc, covering West London, East

London, London, South East, England, UK etc etc). We need an

independent organisation to take control of checking the methodology of

different indices and combining them and splitting them to offer

meaningful hedges"

 

NO. You need ONE index that works, in order to build liquidity.

Once the liquidity is big enough, and it is a demonstrated success, a second and a third hedging index can be added, and the appropriate buyers and sellers can then be sought.

 

If an exchange or a bank launched multiple indices straight away if would fragment the initial interest, and they may all die for lack of trading appetite, or because spreads are too wide. My guess is that a Greater London residential index would be the best start. But the Halifax index is too flawed for a number of reasons (mainly it gets pushed up when FTBers and BTLers slow their mortgage requests on cheaper places.)

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you can bet on London and UK house prices for Sep09 and Dec09 with Igindex...at £10/pt starting at 155.7 this morning for UK Hps..

(10/pt means £10 per thousand pounds movement in HPs)

Not very far into the future though.

 

Okay. Thanks for that Note. Do they use Halifax or Nationwide's index ?

 

It could be useful, but it is a bit too close to today to achieve what I want.

I wonder if they would go to Dec.2010 or Dec.2011 ?

 

Maybe we can find two matching parties on the website, and then "put the trade through" with IG Index or someone else?

 

( Hmmm... upon reflection, that might be a useful role for GEI, perhaps thru the GrudgeBet thread )

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It's not are main focus on this thread, but...

 

Commercial Property Derivatives are another interesting arena for trading & investment

 

Prices are still sliding there it seems

CFN835.gif

 

Above is from an article in The Economist

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Okay. Thanks for that Note. Do they use Halifax or Nationwide's index ?

From IG: Settles basis the HBOS monthly seasonally adjusted Standardised Average House Price survey

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I'm going to add Month-end BDEV prices and Mortgage Approvals to the historic data

 

=====: HPI NSA : -1 year- : -4 year- :-Longest- // BDEV : MtgAprv

Dec-06: 183,645 : 20x,xxx : 20x,xxx : NotAvail // 1235.0 : 115.00

Mar-07: 193,180 : 20x,xxx : 20x,xxx : NotAvail // 1105.0 : 114.00

July-07: 200,578 : 20x,xxx : 20x,xxx : NotAvail // 935.00 : 112.00

Aug-07: 201,081 : 198,572 : 205,592 : NotAvail // 928.50 : 106.00

Sep-07 : 200,168 : 195,164 : 199,167 : 327,275 // 748.00 : 100.00

Oct-07 : 197,817 : 195,164 : 191,160 : 311,261 // 652.50 : 89,000

Nov-07 : 194,258 : 183,970 : 183,970 : 397,612 // 465.25 : 83,000

Dec-07 : 195,333 : 174,823 : 178,730 : 389,689 // 455.50 : 72,000

Jan-08 : 191,275 : 169,278 : 173,104 : 381,594 // 422.00 : 73,000

Feb-08 : 193,448 : 176,929 : 174,060 : 381,594 // 422.50 : 72,000

Mar-08 : 190,619 : 176,323 : 168,698 : 495,609 // 413.50 : 64,000

Apr-08 : 190,952 : 163,264 : 158,490 : 473,561 // 275.25 : 58,000

May-08: 186,482 : 165,173 : 154,671 : 469,561 // 182.50 : 42,000

=====: HPI NSA : -1 year- : -3 year- : -5 year- // BDEV.L : MtgAprv

Jun.-08: 181,765 : 157,577 : 142,659 : 153,848 // 058.00 : 36,000

July-08: 178,440 : 153,591 : 137,233 : 153,591 // 095.00 : 33,000

Aug-08: 178,408 : 140,075 : 150,782 : 150,782 // 147.00 : 32,000

Sep-08: 173,350 : 144,712 : 138,572 : 145,589 // 104.75 : 33,000

Oct-08 : 168,158 : 134,346 : 117,011 : 128,279 // 077.00 : 32,000

Nov-08: 162,848 : 123,764 : 109,108 : 119,693 // 046.25 : 27,000

Dec-08: 158,437 : 126,750 : 109,322 : 124,075 // 070.00 : 31,000

Jan-09 : 159,818 : 127,854 : 110,274 : 115,069 // 069.50 : 31,000

Feb-09 : 159,208 : 128,258 : 111,873 : 119,864 // 085.50 : 37,937

Mar-09 : 157,066 : 125,774 : 117,814 : 124,182 // 088.75 : 39,230

Apr.-09 : 157,156 : 127,296 : 125,725 : 130,439 // 140.50 : 43,201

May-09 : 160,869 : 148,804 : 144,782 : 150,413 // 158.50 : 43,414

Jun.-09 : 158,807 : 147,195 : 143,173 : 148,804 // 147.50 :

July-09 : 160-,xxx : ???-,??? : ???-,??? : ???-,??? // 198.50 :

 

Mtg.Approvals :: http://www.housepricecrash.co.uk/graphs-mo...e-approvals.php

Old format

=== -Aug07- : -Sep07- : -Oct07- : -Nov07-

Spot 200,578 : 200,168 : 200,168 : 197,817

2008 198,572 : 195,164 : 195,164 : 183,970

2009 200,578 : 196,165 : 195,164 : 182,981

2010 203,586 : 196,165 : 191,160 : 183,970

2011 205,592 : 199,167 : 191,160 : 183,970

2012 208,601 : 202,170 : 191,160 : 183,970

2013 214,618 : 206,173 : 198,166 : 185,948

 

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PRICE DISCOVERY FOR UK PROPERTY DERIVATIVES

 

London - 13February 2007

 

GFI Group Inc. (Nasdaq: GFIG) has launched FENICS® Property, on-line price discovery software to support the rapidly growing UK property derivatives market.

FENICS Property users can view prices currently available in the market, the property returns implied by these prices and graphs of historical data. This enables analysis of the relationship between property derivatives prices and property performances thus identifying opportunities for profitable trading or investment.

 

"The UK property derivatives market has grown rapidly in recent years and FENICS Property should help support its continued growth", said Mike Levi, head of European property derivatives at CBRE/GFI - a collaboration between GFI and CB Richard Ellis which is now a leading broker in property derivatives.

 

Total volume for UK property derivatives transactions to the third quarter of 2006 was £3.7bn, according to IPD - a supplier of independent market indices and portfolio benchmarks to the property industry. The first deals in continental Europe have recently been executed, demonstrating its growth potential.

 

FENICS Property is a new part of GFI's FENICS product range - leading software and data for pricing and risk management in foreign exchange, credit and freight.

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Tradition Future HPI / SPREFS chart, Jun/09

9k6pz9.png

The step up clearly indicated a turn in the Halifax, but unclear whether it's done or ongoing?

 

To me, it looks like it is at/near possible resistance

1249273053062376800.png

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Jul/09

HPI (NSA) 158,807 (to date)

1 year 149,676

3 year 142,926

5 year 150,867

 

Chart Tradition Future HPI and Halifax SA, Jul/09

 

Credit to Spline on HPC.

 

Are we trading? :)

 

My preference would be to trade 3yrs, but happy to do 1yr if that's too far away for you.

 

I have sent an email to Tradition, asking them for updated prices

 

Have you seen the other thread, Understanding Property Derivatives?

I will post this there also

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In terms of a comment earlier about posting property as collateral on a trade, I guess that would work apart from the fact that most property is already committed under a first lien vis a vis a mortgage. Really we only tend to accept cash or gilts as collateral on these types of trades - you want something uncorrelated to the trade terms really.

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In terms of a comment earlier about posting property as collateral on a trade, I guess that would work apart from the fact that most property is already committed under a first lien vis a vis a mortgage. Really we only tend to accept cash or gilts as collateral on these types of trades - you want something uncorrelated to the trade terms really.

 

The ideal counterparty for the property derivative is the bank providing the mortgage loan,

since if the Property owner SELLS the upside in the property price, that is fine, his equity increases

at the time he has to pay out on the derivative.

 

And if the property index falls in value, the incoming payment due him, will help to secure the mortgage.

 

The key thing is that the derivative be written in the right direction:

 

If a property owner buys the Upside, and tries to secure it with his equity in a property, he is actually

doubling his risk. If prices fall, he loses on the property, and loses on the derivative at the same time.

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=====: HPI NSA : -1 year- : -4 year- :-Longest- // BDEV : MtgAprv

May-09 : 160,869 : 148,804 : 144,782 : 150,413 // 158.50 : 43,414

Jun.-09 : 158,807 : 147,195 : 143,173 : 148,804 // 147.50 :

July-09 : 160-,xxx : ???-,??? : ???-,??? : ???-,??? // 198.50 :

 

Peter S. of Tradition was kind enough to give me an update on the market.

 

It has continued strong.

The "3-4 year forward" is now at a 3% PREMIUM (!) to Spot.

 

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IMHO they will do this, small rise in 2010, then flat...

http://www.housepric...rice_predictor/

khp_nov2009.png

The Prop Derivs are not predictive. They merely reflect sentiment.

 

They were at a huge discount in Feb.2009, instead of today's premium

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