Spread bets, futures and contracts for difference can cover a number of different areas, one of the most interesting of these is for house prices.
There are two reasons (we can think of) as to why you would do this. The first is to hedge against a bigger position that has been taken, the other is that you have a strong opinion that you think is simply ignored by market sentiment.
In this post we will look at the speculative position. Many people are already taking a speculative position on the housing market, but they don’t know it. They are the people who can meet the criteria for a mortgage and either still rent even though it would be cheaper for them to pay the interest on a mortgage or (more commonly, even now) who buy a house at a high loan to value ratio even though renting a similar property would cost them less money. In both cases they are doing this because of their idea of where house prices are going to go.
These people are doing something less cost effective now for what their opinion of their financial well being will be in a few years. In essence this is speculation, as they are paying now for an uncertain outcome later. However it is not just paying now, it is also putting a large amount of money at risk. The growth in both house price futures contracts and in spread betting exchanges’ activities on house prices means that the speculation can be more controlled, and the dreaded down side is limited to some lost money now rather than some unlimited loss later.
In the next post we will look at the hedging position. In a subsequent post we will look at how you can speculate on the housing market without putting capital at risk.