Make money from falling house prices!

A new product from a state-run bank will soon enable you to bet against house price movements!

I love a good flutter. Always on the Grand National and the Gold Cup, plus a few bets here and there on everything including football, cricket, heck even the likely winner of X Factor.

So I was interested to hear about a new financial product from Royal Bank of Scotland that allows you to essentially bet on the housing market.

In other words, you’ll be able to make money from falling house prices. But although that sounds great, it’s left me a bit uneasy.

How it works

Royal Bank of Scotland already offers index-linked products, which essentially allow you to bet on the price movements of goods like gold. This will work in a similar way, tracking the Halifax House Price Index.

You make the investment over a fixed term, say two years, and the amount that the index changes over the two years determines what you get back. So if you reckon it will rise, and after two years the index shows a house price growth of 20%, then you will get a 20% return on your investment.

Should the market have gone the other way, you will lose 20%.

A form of the product – named the UK House Price Bear – was tested last year with a wealth manager. Now the bank plans to roll it out properly in the next six months.

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House price uncertainty

The timing of the product launch announcement is particularly interesting, coming as it does after a house price index indicated house prices had fallen for the first time in almost a year. According to Nationwide, the average property price fell by 1% in February, bringing an end to nine straight months of house price growth.

And that has been all that was needed for predictions of a second house price slump to grow in number. Suddenly being able to make money out of falling house prices becomes more tempting.

Is it ethical?

I know it’s asking a lot to expect businesses – particularly those involved in the financial markets – to operate in even a slightly ethical way, but this whole concept has left me feeling very uneasy.

I’m not a big fan of making money out of other people’s misery – crazy I know. And no matter how much many people like to dismiss house prices as irrelevant, once you are on the ladder – and particularly if you have an outstanding mortgage – they are anything but.

Yes, most of us buy a property to live in, but there will be a time when you need to move on, perhaps for a job or because your family is growing so you need more space.

And falling house prices can trap you in negative equity.One of my bugbears has long been the inaccurate way certain sections of the media report negative equity as being the end of the world, and ridiculously linking it to repossession, which is downright irresponsible.

However, it does trap you, should you be hoping to move on elsewhere.

If you are in negative equity, you will be seriously out of pocket if you need to move elsewhere – the money you get for your home will not be enough to cover your existing mortgage, and you’ll have to be able to deliver a deposit on the new property on top.

And knowing that I am making money out of an increasing number of people experiencing this situation does stick in my throat a touch.

And yes, there are certainly lots of people unable to get on the ladder, who are renting and desperately hoping prices will fall. I have a lot of sympathy for them, but they don't have to worry that a shift in house prices will force them to lose the home over their head.

Of course, this is just my opinion, and I know some of you reading this will strongly disagree with me. We like to make sure all sides of the story are represented on lovemoney.com, so you are welcome to make a case explaining why I'm wrong using the comments box below!

A state-run bank

I appreciate that perhaps I am just being a bit sensitive. Investment has rarely had any need for the concepts of right or wrong.

However, I also have real trouble with the idea that such a product is being offered by a bank that is majority-owned by the State.

A State remember which has pumped millions and millions of pounds into the housing market, to prevent the sort of house price crashes that RBS now suggests you can make money out of.

It just seems a bit perverse.

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Relying on an index

My final problem, after all that, is actually a practical one – I’m not that convinced about tying it to the Halifax House Price Index.

I’ve been writing about the various indices, from Halifax to Nationwide to Hometrack, for an awful long time and I’m still yet to be convinced as to just how accurate they are. Let’s compare the three major house price indices, and what they reckoned happened to house prices in January:

Those are some pretty wild variations – Halifax reported half the house price increase of Nationwide, and less than a third of the increase suggested by Land Registry. Obviously they operate different methodologies – with Nationwide and Halifax for example, the data basically comes from their own lending – but such variances undermine the entire process, and quite honestly may be open to manipulation.

It’s one thing to invest in a tracker product that follows the movements of the FTSE for example, as the numbers are outside of the influence of whoever you invested with. That’s not the case here. Obviously I’m not suggesting that RBS would actually manipulate the figures for their own gain, but the fact that such abuse is not beyond the realm of possibility is a worry.

Yes, making money out of the fluctuations that are part and parcel of the UK housing market may seem attractive, particularly if you have seen your own home fall in value and fancy making a few quid back. However, not only is it ethically dubious, there are also too many question marks over its practicality for me to be rushing off to sign up when the product launches later this year.

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