Derivatives: Price falls expected, but not too far
Although the rise in average UK house prices (according to the HBOS HPI) continued through to August 2007, the slowing in the market began to be reflected in September and October data. The effects of the US credit crunch are finding their way into the UK housing market via a downturn in mortgage approvals and a clear change in sentiment in a market where the average time it takes to sell a house has risen to more than three months.
However, forward prices began their downturn some months earlier. The chart tells the story of forward prices versus spot better than words can. In this chart the forward price has been expressed in cash terms per the TFS Property Future House Price Indices.
The red line arcing lower is the rolling 2010 contract, the green line is the altogether calmer HPI (the non-seasonally adjusted version). Thus forward values have dipped below spot values for the first time since there has been a formalized forward curve in UK residential markets.
Whether HPI property derivatives are a leading indicator for the HPI or merely a noisy, erratic cousin is a moot point. Whatever, the forward price versus spot price in the UK residential sector is – at the very least – a sentiment indicator at this time.
| TFS UK Residential Property Derivative Futures and HPI Index |
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| Source: TFS |