The bet's on the house

If you fancy a flutter on future UK house prices, a US firm could pay out for accurate predictions
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The Independent Online

Worry not about the property market's ebb and flow during the past 18 months because now homeowners and onlookers alike will soon be able to hedge their bets on house prices - literally. A United States firm believes it can protect UK homeowners from a slump in house prices - and make a profit into the bargain - by offering for sale what is, in effect, a security bond that pays out if you accurately predict whether house prices go up or down.

Www.hedgestreet.com has been trading for two years in the US and it says it is to expand into the UK in the next 12 months.

In the US, it works like this: the website states a specific predicted event (for example, "Brooklyn house prices will drop 1.5 per cent or more in the final quarter of 2005") and investors can buy contracts, known as "hedgelets", saying yes or no; the hedgelets are priced at between $1 (57p) and $10 depending, as in all forms of trading, on the balance of supply and demand; individuals must stake a minimum of $500 and they can buy hedgelets based on predictions of local house prices in Chicago, Los Angeles, Miami, New York, San Diego or San Francisco.

Administrative charges are relatively small - about $5 for the first 100 hedgelets and then a much-reduced proportional cost for larger sums invested; at the end of every calendar quarter, the contracts are "settled" on the basis of the authoritative local price index (in the US, this usually comes from the city council). So, for example, if an investor pays $5 per hedgelet on the prediction that Brooklyn property prices will drop 1.5 per cent or more in quarter four of 2005, he will lose his stake if the city's prices fall by less than that amount. If they do fall by 1.5 per cent or more, the investor gets back $10 for every $5 hedgelet.

Hedgestreet also sells hedgelets on a range of other statistics, including regional and national stock exchange indices, financial figures such as GDP and economic growth, unemployment data, and goods and services. It emphasises everyday statistics, so, for example, much of the mainstream US publicity for the idea has revolved around speculating on the future price of petrol - a pre-occupation in America that rivals the British public's fascination with house prices.

Hedgestreet says it wants to democratise this "derivatives" market that has for decades allowed this sort of speculative investing - but until now it has been for professional investors only. The firm's unique twist is that the contracts are low price and can be bought via the internet. All you have to do is become an approved member of Hedgestreet, which checks your financial bona fides before permitting you to invest.

No details have been revealed as to how a British version will work, but one problem is the plethora of housing indices that appear, at first sight, to give contradictory information. The most respected indices are the Nationwide and Halifax, using mortgage-lending data, and the Government's indices from the Office of the Deputy Prime Minister and the Land Registry based on actual sales. But there are others, such as that from www.rightmove.co.uk that deals with asking prices, rather than sale prices. As the past few months have shown that each of these indices differs markedly from the others.

Hedgestreet is not the first financial company to promote speculation on future house prices. At least four major international institutions - Goldman Sachs, Dresdner Kleinwort Wasserstein, J P Morgan and UBM - have issued UK property-based bonds of some kind. And until recently, the gambling fraternity could also enjoy a spread-betting facility run by betting firm IG Index. But there was one problem. In late 2004, so many people became pessimistic about the short-term future of the UK market that all the bets placed were predicting falls, so IG pulled the plug on it.

Those pundits have been proven wrong, by whichever index you care to quote. But what is still open to question is whether prices will move up, down or stay about the same next year - so now may be just the right time to place your bet.

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