There’s money to be made in London bricks and mortar

ONLY a year ago, property prices were plummeting across the country. But news on Friday from mortgage lender Nationwide that UK house prices surged 1.2 per cent this month – the biggest monthly rise since August and a number that beat expectations of a meagre 0.3 per cent gain – was cause for optimism. The Centre for Economics and Business Research is also predicting a strong recovery.

When it comes to the startling recovery in the housing market, there can be no doubt that London has led the market for the rest of the country higher. The capital saw the strongest annual growth of any English region in 2009 and property asking prices returned to positive annual growth as early as July, compared to October for the UK as a whole.

In the fourth quarter of 2009, London’s properties saw their value increase on average by 3.4 per cent, taking the average house price in the capital to £276,088 according to Nationwide.

Rightmove’s January survey indicated that London asking prices rose 2.3 per cent last month and the average property asking price in Greater London stood as high as £407,731.

And through IG Index, spread betters can take a punt on whether London’s housing market strength is going to continue in 2010 or not. The spread betting provider offers just one contract for the London house price index, compared to two for the nationwide index.

It takes the closest contract month – currently March – and uses the quarterly Halifax house price index as the underlying. The contract price is determined primarily by sentiment in the market but is also updated by the provider when the monthly figures are released.

Fourth quarter data from the Halifax showed that average property prices in the capital hit £255,473. The current spread on IG’s London house price index is 254.6-260.6, where the prices are given in points per £1,000 – based on a mid-point of £257,600. This suggests that spread betters are expecting a slight rise in Greater London house prices by the end of March, in spite of all the uncertainty, says David Jones, chief market strategist at IG Index.

Bear in mind though that the market can be a little a bit choppy week in week out, says Jones.
“We only get house price data once a month, so sentiment of clients can really drive the markets.”
But with the economy still deep in the doldrums, how have house prices managed to rise so sharply and will they continue to do so? One reason is that the demand for housing outstrips supply. As buyer interest picked back up last year along with the economy, demand for houses increased.

Simon Ward, chief economist at asset management firm Henderson, thinks that the swift cut in interest rates imposed by the Bank of England last year was crucial in underpinning demand in the housing market by making mortgages cheaper. There has also been a severe shortage of stock in the market, which has also served to push prices up further.

This is expected to continue into 2010, although much more modest price gains are forecast for the year. Many economists believe that the looming hike in interest rates and removal of monetary stimulus will push the market back lower again. There is also a very strong case to be made that the UK housing market is stuck in a bubble: prices are getting closer to their peak, which was massively overvalued on a long-term price to earnings basis. Prices in the US have fallen much further.

Whatever your view on the London housing market, you can take a speculative punt on the market. Taking out a spread bet on the index could go some way towards hedging price moves on your own physical properties.

However, as you can only bet £150 a point on the London index, you’d be hard pushed to fully hedge the price of your house.