Hedging against House price decreases

MG

Like many other people in Ireland I have a bit of equity built up in my house value. However, my belief is that it is seriously overvalued, possibly by as much as 30%.

At the weekend, I was looking at ways to hedge the risk of this fall. I have costed selling up & renting and this makes great financial sense if there is a fall in value in the next say two years. However, if there is a zero rise in house values in this time, it means going to an awful lot of hassle.

It would be much better if I were able to simply buy an option to sell. Does anyone know if there are any hedging mechanisms for house values available in Ireland?

Sponge Bob

never heard of any 'put' type options like that or of an insurance based hedge instead of a hadge hedge.

dahamsta

If I was any good at gardening, I'd be able to insert an incredibly funny hedge joke here.

silverharp

In the US they are introducing an index on the large cities where you can buy options, but not much help here

Selling and renting or borrowing against the asset and investing in non correlated assets are the only options I can think off otherwise moving to the country

MG

silverharp wrote:

In the US they are introducing an index on the large cities where you can buy options, but not much help here

Selling and renting or borrowing against the asset and investing in non correlated assets are the only options I can think off otherwise moving to the country

Any idea what investments would be negatively correlated against house values in an Irish context and would give a decent return in an environment of rising interest rates?

I wouldn't be too confident it's possible.

ronbyrne2005

any property reliant companies in irish stock exchange like the big banks ,i heard anglo have massive exposure to property,theres a property company that was spun off from fyffes recently.

silverharp

MG wrote:

Any idea what investments would be negatively correlated against house values in an Irish context and would give a decent return in an environment of rising interest rates?

I wouldn't be too confident it's possible.

Commercial property funds in Asia or Germany although not negetively correlated at least would offer an arbitrage


If you expected deflation then gov bonds would be negetively correlated however this would only work if you sold and rented or were prepared to pay the premium as your insurance cost

If you expected inflation then borrowing at a fixed rate and buying gold share funds or gold ETF's would work. Even a 5% to 10% invested in gold would offer a great hedge as gold would be expected to go to at least $2k per oz. Even in a deflation gold is a good asset to have as there would be a flight to quality as gold is one of the few assets not backed by debt.

It's an interesting issue, I made a point of paying my mortgage down and investing in gold as a hedge, although the jury is still out on the whole inflation/deflation issue, I am convinced that property as a multiple of salary will have to drop (5-10 years)

MG

silverharp wrote:

Commercial property funds in Asia or Germany although not negetively correlated at least would offer an arbitrage


If you expected deflation then gov bonds would be negetively correlated however this would only work if you sold and rented or were prepared to pay the premium as your insurance cost

If you expected inflation then borrowing at a fixed rate and buying gold share funds or gold ETF's would work. Even a 5% to 10% invested in gold would offer a great hedge as gold would be expected to go to at least $2k per oz. Even in a deflation gold is a good asset to have as there would be a flight to quality as gold is one of the few assets not backed by debt.

It's an interesting issue, I made a point of paying my mortgage down and investing in gold as a hedge, although the jury is still out on the whole inflation/deflation issue, I am convinced that property as a multiple of salary will have to drop (5-10 years)

I'm not convinced commodities are the way to hedge Irish property as it is such an unusual & unique market. It just goes to show what an inflexible investment property is.

silverharp

I agree it’s not easy, it’s easier to know what not to do, buying rental properties in Dublin come to mind. Thinking about it a bit more there are other hedge aspects to consider, for instance € risk, the Irish economy is unlikely to go south unless Europe goes down too so from an investment point of view having some kind of Asian denominated assets would be useful, your property may never go down in terms of euros however if the euro and dollar devalue against Asian currencies then your Euro assets are being devalued by the back door, maybe a consideration for pension portfolio or other funds

MG

silverharp wrote:

I agree it’s not easy, it’s easier to know what not to do, buying rental properties in Dublin come to mind. Thinking about it a bit more there are other hedge aspects to consider, for instance € risk, the Irish economy is unlikely to go south unless Europe goes down too so from an investment point of view having some kind of Asian denominated assets would be useful, your property may never go down in terms of euros however if the euro and dollar devalue against Asian currencies then your Euro assets are being devalued by the back door, maybe a consideration for pension portfolio or other funds

I tend to disagree. I think the main external effect which will effect the property market is ECB rate rises which are less likely in a faltering EU economy. That and a general recession which is difficult to hedge against anyway. I think the Irish property boom has reached a point where it is self propelling which makes it difficulty to hedge against.

D'Peoples Voice

MG wrote:

It would be much better if I were able to simply buy an option to sell. Does anyone know if there are any hedging mechanisms for house values available in Ireland?

I'm waiting for the irish equivalent of these to be launched
http://www.tipsheets.co.uk/Propertylinkedwarrants.pdf

Catney

Oh i dont think attempting to hedge is a good idea at all. To work you would have to make sure that the tool you used would be negatively correlated to Irish house prices. Taking into account Irish house prices are being driven by the populace and hence not all professional investors, a certain economic circumstance could not be 100% certain to have a desired effect. ie 2 interest rate rises and well known that there are 2 or 3 more on the way, and house prices are increasing at a rate that hasnt been seen in years.

MG

Catney wrote:

Oh i dont think attempting to hedge is a good idea at all. To work you would have to make sure that the tool you used would be negatively correlated to Irish house prices. Taking into account Irish house prices are being driven by the populace and hence not all professional investors, a certain economic circumstance could not be 100% certain to have a desired effect. ie 2 interest rate rises and well known that there are 2 or 3 more on the way, and house prices are increasing at a rate that hasnt been seen in years.

Are you saying that hedging is not a good idea or that there is no suitable tool to hedge with. I would agree with the latter but not with the former.

Catney

Well I just think attempting to hedge is folly. I dont think it can be done. Would be nice though.

antoinolachtnai

It can be done, at least in principle.

You do it by short-selling mortgage indemnity bonds. (That funny thing you buy when you buy a house, to cover the bank in case of negative equity.)

This is how it's done with the UK products, as I understand it.

Victor

ronbyrne2005 wrote:

i heard anglo have massive exposure to property

This may be much more Anglo's clients rather than the bank itself.

bbbbb

This is a bad idea for 2 reasons:
- your house is your home, not an investment
- hedging/option mechanisms give you lots of leverage but are v.risky. Not only do you need to guess the direction of the market, but also when it's going to happen. People have been predicting property to drop since about 98-99 now I think.

MG

bbbbb wrote:

This is a bad idea for 2 reasons:
- your house is your home, not an investment
- hedging/option mechanisms give you lots of leverage but are v.risky. Not only do you need to guess the direction of the market, but also when it's going to happen. People have been predicting property to drop since about 98-99 now I think.

Well, yes and no. Of course a home should not be seen as an investment but if it is not intended to be a long term residence then this changes the picture. The equity built up in the house is illusory in my opinion as I believe my house is overvalued by maybe 30%. However, I could effectively crystallize this profit into a real gain if I could purchase a put option on the house. Naturally there would be a cost but as I intend to move house within two years I would be willing to spend a certain amount to ensure that my equity does not fall in the meantime. Of course, in my position I am partially hedged already as any house I move into would also fall in value with any bursting of the bubble but if the price of an option was not prohibitive I would be happy to limit myself to upside price movement only.

shoegirl

The 30% is probably going to turn out to be an average value.

So this means that some properties might be overvalued by 50% - others not at all - potentially even undervalued.

What you need to do is assess your risk - for example rents fell in Lucan and Swords a couple of years ago - which might indicate that these areas are high risk for investors and potential landlords. On the other hand what goes for the rented sector is different for owner-occupiership.

One of the sad effects of the UK property bust was that it impacted some areas (basically the north) more severely and lasted longer in them than in the areas with a "natural" high demand.

My concern would be outlying suburbs in Kildare, Meath and Wicklow in Dublin, and areas in other cities more than 15 miles away from the main urban centre - these are accelerating at a fast pace now (Whitegate anyone?) and may be more hard hit in the event of a bust.

You might not actually be overvalued if the area is not likely to see a total collapse in demand.

fintan

http://www.macromarkets.com

In todays observer apparently they are launching a UK property hedging product.

GreeBo

shoegirl wrote:

The 30% is probably going to turn out to be an average value.
So this means that some properties might be overvalued by 50% - others not at all - potentially even undervalued.

I think this is the point that a lot of people miss.
Sure, "houses" are overvalued, but the important question is, "is my house overvalued?"
To attempt to answer this question you need to ask yourself "would people want to live here?"
So taking prices out of the equation, is it a nice/good place to live?

Personally I think some places are going to be decimated, 1 bed apartments 8 miles from the city centre for example. I just dont seem them having real value.