Insure against house price declines?

[Sean]

Does anyone know of a way to insure against a house price decline in the short term of say 1-2 years?

e.g. like income or mortgage insurance, is it possible to pay some amount like $10,000 pa to insure or hedge against a house falling in nominal value? Assuming that the house is not changed to lower its value, suffers some catastrophe beyond normal depreciation, etc.

There was one hedge fund in the US in particular that totally cleaned up when in fact houses did lose value and lots of derivative lending products like MBSs went belly-up -- but this was a hedge fund manipulating financial instruments, not a single home-owner insurance product.

I find it interesting that John Edwards of Residex *swears* in the papers that falls of even 10% over a year or two in the market simply aren't possible in the current Australian economy, so surely he would be prepared to put his money where his mouth is and offer such an insurance product to back up his cast-iron unshakeable certainty?

Further, if *no-one* is prepared to offer such a product, what does that tell you about the potential volatility of house prices?

Cheers,
Sean

 

[buzzlightyear]

Further, if *no-one* is prepared to offer such a product, what does that tell you about the potential volatility of house prices?

Probably means the ability to define the actuarial risk of this happening to a specific property (given the variables across different properties) is close to impossible.

 

[ffc1883_1996]

Just an idea

It’s not really insurance, however, if you want to hold a property for the long term despite being convinced that it will loose value over the short term, you could consider refinancing into a shared equity loan for a couple of years.

I’ll be keeping an eye on the development of these sort of products with the view that they perhaps could be the best way to hold leveraged property through flat or down markets.

 

[murtagh]

Further, if *no-one* is prepared to offer such a product, what does that tell you about the potential volatility of house prices?

Nothing?

I can't find anyone to insure against my yoyo descending either.

I could write a book on what this tells us about the price of ham in India.

 

[GoAnna!]

How do you suggest such a product would work?

Would insurance make up for any short fall in the sale price? Would that mean the insurer would control the sale process?

 

[Sean]

How do you suggest such a product would work?

Would insurance make up for any short fall in the sale price? Would that mean the insurer would control the sale process?

Well, people seem so bullish on house prices. People like John Edwards of Residex call a supposed 1% fall in prices in Sydney 'a once in 100 years event' and a catastrophe -- he seems to think, and constantly advertises through the MSM, that property price rises will reliably outstrip inflation, wage inflation, CPI, etc year after year after year. It's happened every year for the last 50 years reliably according to John Edwards.

If this is the case, then surely some insurer would be happy to bet on prices rising and rising forever like this. Or is perhaps John Edwards some sort of liar? If so, why does he constantly misrepresent what house prices can do in the MSM? What would be the benefit to him of doing that?

Even a real estate agent in Sydney told me just a month ago that house prices *always* double every 7-10 years in Sydney. I find it odd then that he doesn't get a lot of finance together and buy whole suburbs himself, it's strange he'd rather just sell individual properties to other people on commission when he could be making so much more through the risk-free capital growth he is so sure about. Or is he possibly lying as well?

However, I would see an insurer take a premium of say, $10K pa, to insure against up to $100K fall in a property. Given how it always goes up.

 

[wylie]

Even a real estate agent in Sydney told me just a month ago that house prices *always* double every 7-10 years in Sydney. I find it odd then that he doesn't get a lot of finance together and buy whole suburbs himself, it's strange he'd rather just sell individual properties to other people on commission when he could be making so much more through the risk-free capital growth he is so sure about. Or is he possibly lying as well?

However, I would see an insurer take a premium of say, $10K pa, to insure against up to $100K fall in a property. Given how it always goes up.

How would the agent pay for the loans while waiting for the prices to rise?

Be sensible, please .

 

[GoAnna!]

Wow if people are prepared to pay $10K per annum to insure against possible price drops I might set up an insurance company myself

I guess LMI is in effect a similar insurance as the insurers are pretty confident that on the whole their loans will be covered by the proceeds of the sale if a forced sale came to pass.

So what you are really asking is if people really belive that propertuies will keep rising them why don't they put their money where their mouth is? Well I think they do. They buy negatively geared property. What greater demonstration of people's faith in the belief that properties rise in value

 

[Sean]

How would the agent pay for the loans while waiting for the prices to rise?

Be sensible, please .

Govt assisted negative gearing, just as go-anna's comments suggest? Rent offsetting some of the amount, NG a further amount? Just like all of today's underwater specuvestors are doing...

So what you are really asking is if people really belive that propertuies will keep rising them why don't they put their money where their mouth is? Well I think they do. They buy negatively geared property. What greater demonstration of people's faith in the belief that properties rise in value

I am asking that as a side question. But there is a flight of investors from negatively geared property right now according to the papers -- as capital gains seem to be peaking and news of mortgage meltdowns in the US gets around, people aren't so sure about committing 20-30 years wait for the breakeven point -- if there ever is one.

Certainly individual 'mum and dad' amateur investors have been lead to believe in the power of negative gearing in recent years of property boom by seminar spruikers and property marketeers, but that belief seems to be slowly waning these days.

Note also that Australia and NZ are the only countries in the world which allow such generous tax breaks on property expenses. There are only 3 countries that allow NG at all, Canada being the third -- and they don't allow depreciation as a deduction.

 

[buzzlightyear]

Just like all of today's underwater specuvestors are doing....

Ok, we can add Specuvestors to the current lexicon to sit beside specufestors.

I am asking that as a side question. But there is a flight of investors from negatively geared property right now according to the papers -- as capital gains seem to be peaking and news of mortgage meltdowns in the US gets around, people aren't so sure about committing 20-30 years wait for the breakeven point -- if there ever is one.

I suspect you are placing far too much credence on the influence that investors have on the market. The availability of finance (and its price) is a far more influential factor.

Certainly individual 'mum and dad' amateur investors have been lead to believe in the power of negative gearing in recent years of property boom by seminar spruikers and property marketeers, but that belief seems to be slowly waning these days.

Given 6 consecutive years of declining marginal tax rates, the incentives for negative gearing, as a means of minimising tax, are reducing along with it.

Note also that Australia and NZ are the only countries in the world which allow such generous tax breaks on property expenses. There are only 3 countries that allow NG at all, Canada being the third -- and they don't allow depreciation as a deduction.

So what?

 

[GoAnna!]

Its not that complicated.

People buy what they think will make them money. Capital growth drops or flattens and less investors buy into the market. Duh!

Negative gearing makes perfect sense in a rising market. Not so smart in a flat market. Why does this come as such a surprise?

If you were around this time in the past cycle you would have seen it happen then. It's not new. It is not the end of the world as we know it.

The lack of an insurance product means nothing other than that no-one sees that as a great way to make money. Imagine trying to get decent insurance premiums from home owners when interest rates are higher (and defaults and fire sales more likely). I also presume most would not be interested in the product. Why would you want to pay for a possible dip in prices over the next few years when it will be your family home for the next 10? And if house prices do dip and you want to move house you will be buying back into that same market so overall you are in the same position. Better off if you upgrade.

 

[Sean]

Its not that complicated.

People buy what they think will make them money. Capital growth drops or flattens and less investors buy into the market. Duh!

Negative gearing makes perfect sense in a rising market. Not so smart in a flat market. Why does this come as such a surprise?

It doesn't really come as a surprise. But what you are overlooking is that direct property investment is not very liquid, and, as many people stress, it is 'for the long term'. There appears to have been a great deal of 'irrational exuberance' in terms of underlying fundamentals in housing in recent years also. So you cannot just keep trading properties in a short-term 'investment cycle' conveniently without making loss after loss -- especially after hefty stamp duties and other expenses are taken into account. Putting several hundred thousand leveraged dollars into a single, undiversified commodity class -- housing -- is not the same as buying and selling shares and other market instruments. Something the seminar spruikers and the property marketeers never really make evident in their materials. Duh! indeed.

Further, I think you should study a graph of housing prices vs rent returns and building costs over the past 20-30 years and see if something strange hasn't been going on in the past 7 years -- something that might turn sharply in the near future.

At 2003-04 prices, a negative gearer might break even and stop making a loss after say 35 years, according to one calculation. What sort of 'investment' makes a loss for 35 years? And a loss is a loss, regardless of negative gearing benefits.

The lack of an insurance product means nothing other than that no-one sees that as a great way to make money. Imagine trying to get decent insurance premiums from home owners when interest rates are higher (and defaults and fire sales more likely). I also presume most would not be interested in the product. Why would you want to pay for a possible dip in prices over the next few years when it will be your family home for the next 10?

I have a commercial need not to see prices drop for 12-24 months. I would be willing to pay $10K pa for 1-2 years to avoid a $100-200K drop in values.

 

[Sean]

Ok, we can add Specuvestors to the current lexicon to sit beside specufestors.

'Specuvestor' was coined on sites like patrick.net as a portmanteau of 'speculative investor'. The homophone 'infest' was then added to the portmanteau to make 'specufestor' for the triple whammy of contempt... Speculative investors infesting the housing market...

So what?

So things may be about to change, Jimmy. You may lose your precious tax break if you're not careful, especially when it can be shown to be simply a middle class welfare handout.

You might find this Democrats policy document interesting: http://www.democrats.org.au/docs/2004/TAXATION_Negative_Gearing.pdf

 

[wylie]

Just curious Sean, did someone from GHPC send you over to have a bit of fun?

 

[BayView]

Does anyone know of a way to insure against a house price decline in the short term of say 1-2 years?

e.g. like income or mortgage insurance, is it possible to pay some amount like $10,000 pa to insure or hedge against a house falling in nominal value? Assuming that the house is not changed to lower its value, suffers some catastrophe beyond normal depreciation, etc.

There was one hedge fund in the US in particular that totally cleaned up when in fact houses did lose value and lots of derivative lending products like MBSs went belly-up -- but this was a hedge fund manipulating financial instruments, not a single home-owner insurance product.

I find it interesting that John Edwards of Residex *swears* in the papers that falls of even 10% over a year or two in the market simply aren't possible in the current Australian economy, so surely he would be prepared to put his money where his mouth is and offer such an insurance product to back up his cast-iron unshakeable certainty?

Further, if *no-one* is prepared to offer such a product, what does that tell you about the potential volatility of house prices?

Cheers,
Sean

House volatility is gradual compared to the share market, so there is a timeframe protection for you if you watch the markets closely.

The insurance, or "hedging" for buying property at an individual level is done through:

a) the purchase price - buy below market. Not always easy, but if you know the values in the selected area, you won't pay too much.
b) rental yield - make sure it is nice and fat so ther eis no cashflow problems which might trigger a forced sale.
c) deposit - bigger cash component, or use equity from existing property. If you use equity, the cashflow is more important.
d) tax deductions - depreciation from building aids the cashflow.
e) IO loans for cashflow
f) buy in good locations - quiet streets, near amenities, transport, employment etc.
g) buy where rent demand is high
h) buy below median priced properties as these are affordable to a bigger pool of both renters and buyers.
i) reduce debt whenever able.
j) buy near or at the bottom of the market.

In a nutshell, you can't insure against a price drop totally.

The above criteria maximises your chances of the property performing above the market, and the better cashflows protect you from a forced sale.

 

[GoAnna!]

So you cannot just keep trading properties in a short-term 'investment cycle' conveniently without making loss after loss -- especially after hefty stamp duties and other expenses are taken into account.

Who is doing this? I don't know any investors doing short term trades unless addding value such as development which is more of a business than property investment.

Yes trading in the current climate for profit would be challenge to say the least.

That being said there is no point in selling out of the market because the market dips for a while. Selling at the lowest point isn't smart unless it sets you up better for the future.

 

[nonrecourse]

You piched my thunder Aussie oi oi

House volatility is gradual compared to the share market, so there is a timeframe protection for you if you watch the markets closely.

The insurance, or "hedging" for buying property at an individual level is done through:

a) the purchase price - buy below market. Not always easy, but if you know the values in the selected area, you won't pay too much.
b) rental yield - make sure it is nice and fat so ther eis no cashflow problems which might trigger a forced sale.
c) deposit - bigger cash component, or use equity from existing property. If you use equity, the cashflow is more important.
d) tax deductions - depreciation from building aids the cashflow.
e) IO loans for cashflow
f) buy in good locations - quiet streets, near amenities, transport, employment etc.
g) buy where rent demand is high
h) buy below median priced properties as these are affordable to a bigger pool of both renters and buyers.
i) reduce debt whenever able.
j) buy near or at the bottom of the market.

In a nutshell, you can't insure against a price drop totally.

The above criteria maximises your chances of the property performing above the market, and the better cashflows protect you from a forced sale.

Aussie you list 10 ways to insure against a property drop and then say you can't insure against it totally? If you have done all of those things I think you have your posterior covered mate

Two more k) Make sure you have a cash buffer of 3-6 months rent and outgoings.
(L) Have $100,000 in gold bullion for a worse case scenario. This gives you a hedge against a falling Aussie peso

 

[Sean]

House volatility is gradual compared to the share market, so there is a timeframe protection for you if you watch the markets closely.

The insurance, or "hedging" for buying property at an individual level is done through:

a) - j)

In a nutshell, you can't insure against a price drop totally.

All good advice, altho some of those parameters are outside of the control of the individual, e.g. you cannot control which properties come onto the market at what price and in what location, and some of the points are only relevant to a long-term buy and hold strategy. Some are also wish list items that everyone should follow -- of course everyone wants to buy a property at below market prices, and that's why you will rarely ever find such a property, if they ever do come onto the market -- the contractual job of the REA is to get the highest possible market price for their client, after all. Nice fat rental yield -- not relevant in this case, and that's also outside the control of PIs and set by the market -- obviously you can try to pick a high ROE IP, but that rules out most of the inner metro capital cities these days for starters.

Many of a)-j) don't really suit me for a 1-2 year development cycle tho, where the property is in a particular spot outside my control but has other advantages. I'm just trying to guard against a further downturn, this property has already lost 25% value in the last buyer's hands over 2 years. It's fine to have reserves and things, but I'm guarding against making a loss on a development, not a long-term B&H strategy. A loss is a loss in this instance.

 

[boomtown]

However, I would see an insurer take a premium of say, $10K pa, to insure against up to $100K fall in a property. Given how it always goes up.

Im sure some Lloyds names would be happy to take your money (although they may ask for more than $10k). Why dont you give them a phone call.

Lloyd's
One Lime Street
London
EC3M 7HA
UK

Telephone
+44 (0)20 7327 1000

Email
[email protected]
http://www.lloyds.com/

 

[Sean]

Im sure some Lloyds names would be happy to take your money (although they may ask for more than $10k). Why dont you give them a phone call.

hmm, Britain's on the receiving end of a massive house price correction itself right now -- Lloyd's might be a little lairy on that one given local conditions. British property boom/bust cycles tend to be quite extreme also. The premium they quote would probably be as great as the potential drop. I'd rather not wrestle with currency exchange variations on top of that mix either, still more risk to hedge against...