Set your trades on firm foundations

HOUSE asking prices fell again today, dropping by 1.1 per cent – that is £2,474 – over two points in the house price spread better’s mind. But those tempted by the news on page one should not rush into a trade before taking a moment to contemplate the make up of the index. Today’s figures belong to Rightmove. The Rightmove index operates differently from the housing index on which traders can spread bet.

IG index offers the Halifax UK seasonally adjusted index covering all houses and buyers. It is UK-wide and issued monthly, although traders tend to enter for quarterly results. One advantage to this index is that the providers do not charge an overnight fee. The cost of the bet is in the spread.

Unlike Rightmove’s index, Halifax is a predictive index. It is derived from Halifax’s mortgage data at the time of loan approval, whereas Rightmove is reporting on asking prices that have already occurred. Spread betters should bear in mind the way the Halifax index is constructed. Being seasonally adjusted removes the artificial inflation caused by the fact more people look to buy in the spring and summer.

David Jones of IG Index says: “one of the reasons people love the house price index is because most people have experienced it and have a view on it.” This is helpful but traders should note that the index does not include sales to existing tenants or most council houses. Be careful to exclude any impression you get of these house sales when choosing your position.

The other major predictive index in the UK is produced by Nationwide. While you cannot bet on it, it is a very useful source of information. Still, even similar indexes can differ quite a bit (see chart). This can make a real difference in a market with such limited volatility. In August for example Nationwide saw a 0.9 per cent fall in house prices whereas Halifax gave a 0.2 per cent increase.

Betting on house prices can be sluggish. Those hankering after volatility who have a strong view on the housing market could bet on house builders’ stocks such as Redrow. Not only does this offer the trader a chance to get in a greater number of trades but the provider also pins the bet to the underlying market so the spread is tighter and cheaper to enter into.

Price and volatility are not the only advantage in choosing housing stocks over the Halifax index. IG Index’s Jones says: “House building companies have come out of the woods since the crash” while house prices are still looking uncertain.