Making money on sliding property prices - Derivatives!

[spark]

Property derivatives are to be introduced. Your thoughts?

New way to buy property
By Maurice Dunlevy September 11, 2008 09:55am

ASX has joined with RP Data and Rismark to offer derivatives
Investors can get exposure to property market without owning real estate
More property news in our Money section

BUYING into Australia's $3.2 trillion housing market -- without owning a single property -- will soon be a mouse click away.

An agreement between the Australian Securities Exchange and property research groups PR Data and Rismark has paved the way for the introduction next year of residential property derivatives, which will be traded on the ASX like shares, The Australian reports.

Modelled on a successful US scheme that had $US2 billion ($2.5 billion) worth of trades in its first year, Australian investors will be able to both buy and sell derivative or futures contracts in our major housing markets without owning property.

"It's a synthetic way of gaining exposure to Australian housing markets,'' said Paul Williams, the head of property derivatives for GFI Australia.

"This is exciting for our developing property derivatives market.''

The scheme is mostly pitched at investors seeking exposure to property without the hassles of owning real estate and the typical $20,000-$50,000 transaction costs involved in buying and selling residential property. It could also be a godsend for renters priced out of the market by escalating prices.

Rismark International executive director Ben Skilbeck said first-time buyers required to save a $100,000 deposit for a $500,0000 home were commonly locked out because by the time they had saved their deposit, the cost of the house had risen another $200,000.

Mr Skilbeck said owing derivatives meant savings would effectively increase in line with house prices, providing a hedge against a future housing boom.

While the ASX declined to reveal details of the scheme -- including the cost to investors -- market players will be able to punt on falling house prices.

"If prices are going down in Perth, I will be able to sell my derivatives contract at a profit,'' said one analyst.

The scheme, which involves the purchase of derivative contracts from the ASX, is likely to be popular with apartment builders and developers looking to set benchmarks for both pricing and returns.

Read more on this story in The Australian.

http://www.news.com.au/business/money/story/0,25479,24328717-5013953,00.html

 

[Sunder]

Will force D&Gers to put their money where their mouth is.

Even though I regularly short shares, and I expect the housing market to settle a little, I wouldn't short a housing index right now even if it was available today.

Same goes for the perma bulls though - I wouldn't go a long on housing yet either, unless I was going to live in it.

 

[craigb]

Have to think about this one ummmmm scratch!

 

[GreatPig]

Just what the world needs right now: more derivatives.

GP

 

[charttv]

This is exciting news for me. Can't wait to start applying some TA to this market. I hope this contract finds wide acceptance and succeeds.

Who knows, many may never have to bother with direct property again?

 

[boomtown]

What is the mechanism tying it to the underlying market? Are they just going to buy up random houses in random suburbs across the nation?

There is alot of devil in these details. And the potential to create a genuine bubble if its the sort of instrument that permits superannuation funds and other industrial strength investors to get involved.

 

[crc_error]

it will be good to be able to buy PUTS against a property to insure it against falling prices..

 

[GreatPig]

I also have to wonder, if investors are all just going to start buying derivatives instead of houses, and it's a synthetic market, what are renters going to rent?

GP

 

[crc_error]

I also have to wonder, if investors are all just going to start buying derivatives instead of houses, and it's a synthetic market, what are renters going to rent?

GP

since investors wont buy houses, that will take away money which otherwise would have increased demand.. hence houses wont grow as much..

Investors don't owe anything to renters... since renters believe investors are ripping them off, then renters can go and buy their own homes..

 

[plusnq]

I also have to wonder, if investors are all just going to start buying derivatives instead of houses, and it's a synthetic market, what are renters going to rent?

GP

Shorter term options over the housing derivative

 

[Aaron Sice]

so, when a fund decides to short a particular housing market - do all the values in that area plummet?

is the equity in those markets tied directly to the derivative market - ie the value of the derivative market is a direct link to the CG of a particular market? mum'n'dad will think if investors are dumping stock in a certain market, then surely there's a reason?

or is the derivative for the WHOLE of australia?

sounds like someone in the background is trying to remove the last shred of stability against a traditionally stong sector - open the housing market up to "shorting".

if they are linked - you can bet your a r s e the property market will flucutate like the stock market, economies will crash two-fold and the call for a global currency to "stabilise the problem" will be introduced.

 

[crc_error]

sounds like someone in the background is trying to remove the last shred of stability against a traditionally stong sector - open the housing market up to "shorting".

I don't think you understand what options are. Options don't affect the price of the underlying stock. Options are traded on a separate market.

The shorting your referring to is when someone sells(shorts) REAL stock without owning it.. this will affect the price of the underlying asset. EG CFD's. CFD's are traded on the real stock market hence they will affect the actual price.. options are traded on their own exchange and don't affect the main market.

 

[boomtown]

I dont believe its possible to link the 2 markets without buying thousands of Australian houses.

And I dont believe that a fund can manage thousands of individual Australian dwellings as profitably as individual investors.

Doomed to failure.

 

[spark]

I dont believe its possible to link the 2 markets without buying thousands of Australian houses.

And I dont believe that a fund can manage thousands of individual Australian dwellings as profitably as individual investors.

Doomed to failure.

http://en.wikipedia.org/wiki/Property_derivatives

Works well in the UK.

 

[Aaron Sice]

I don't think you understand what options are. Options don't affect the price of the underlying stock. Options are traded on a separate market.

The shorting your referring to is when someone sells(shorts) REAL stock without owning it.. this will affect the price of the underlying asset. EG CFD's. CFD's are traded on the real stock market hence they will affect the actual price.. options are traded on their own exchange and don't affect the main market.

i understand options very well indeed. but options are there to take control of STOCK - which will now link it to the market directly - sorry i prob should have worded it better - but another point is if the mainstream media get a hold of this - word gets out and it becomes a regular section on the "finance" *coughcough* section on the regular news that

"put option prices for Wooloomooloo were down over 65% on expiry today as the June quarter statistics were released showing an increase in the area of almost 9% which saw the derivatives get slammed in the last half of trading today...."

what kind of sentiment will that bring to individual markets? it'll bring confusion and fear.

how do they decide on the sectors for the derivatives? do we just get
"west sydney - dec call $6.00 - dec put - $12.00"
"north sydney - dec call $9.00 - dec put - $9.00"

etc etc?

is it taken by suburb? whole cities?

 

[boomtown]

I dont understand how it works. How does the issuer of the fund fund exits if property doubles in value in a year and everyone decides to cash out of their position?

 

[Aaron Sice]

just thinking...i think they might make a ticker out of the IPD, or maybe conglomerate the top 50 property trusts into a ticker (like the ASX200 is a ticker with a value agaist the top 200 stocks and is weighted accordingly) - it's the only way i see the market being able to form a tradeable stock that can have options and futures along for the ride...

...without crashing the whole f__ing economy.

 

[Aaron Sice]

other than that - i don;t know how you could create an options market without having stock to trade. the whole point of options is to control stock without buying it. you then buy and sell those options for profits or losses.

that's the seperate market bit - great. but how is the value of the stock ascertained? number of stock available? what's the underlying business & fundamentals?

 

[Aaron Sice]

from the wiki link

Uses of Property Derivatives

Property Derivatives provide the investor with the ability to;

• Gain or reduce exposure to the property market.

okay so it's just another leveraged way into property profit - cool.

• Hedge a current position in the physical assets.

great - so a developer can hedge in dodgy times. aweseome.

• Quickly change the composition of a portfolio, i.e. switch out of Retail property and into Industrial.

watch that "sine wave" cycle go out the window now

• To speculate on the property market

uh huh ... more speculation ... but with shares in an underlying asset class ... that the whole WORLD is tied to ... if it IS a conglomerate for the top 50 trusts, and they take a smashing, do they offload their asset base to help prop up the share price by reducing their "exposure"...?

All of these objectives can be achieved without having to transact in physical property.

and how the HELL do you tax a total return swap?

 

[crc_error]

what kind of sentiment will that bring to individual markets? it'll bring confusion and fear.

how do they decide on the sectors for the derivatives? do we just get
"west sydney - dec call $6.00 - dec put - $12.00"
"north sydney - dec call $9.00 - dec put - $9.00"

etc etc?

is it taken by suburb? whole cities?

well, yes call prices falling can cause 'fear' but what I said is they directly don't influence the market as they are not connected.. ie a hedge fund cant keep short selling stock to artificially force the price down as they can with CFD's in the stock market. This is why I don't believe shorting direct stock should be legal. it can/is been used to manipulate the market without you even needing to produce real stock.

I would say there would be selected suburbs which are traded, say top 20 in each suburb.. and it would work on the medium price.. so you could have Toorak Dec call $960,000