Buying or not buying a house can be one of the biggest financial decisions that someone could ever make, and it’s probably the first big non-career decision that most people do make (unless they are putting off starting a pension).  Either you can stay out of the market, and risk watching house prices going up and pricing you out, or you could jump in and find that you own an asset with a declining value, a loan worth more than the house and a number of years ahead of being tied to a house which becomes too small.

In either case the downside is fairly large.  It’s also the case that you could be forced to do something that you believe is going to actually put you at a disadvantage but you have to do this any way as the alternatives of getting it wrong on the other side are fairly large.  Most of us have friends who bought a house not because they thought that prices would go up but because they feared that they would never get on the property market if they did go up.

This is where spread betting, contracts for difference and futures can make a big difference.  Essentially it is possible to treat them as an insurance premium.

Hedging is when you put money predicting that what you fear will come about.  You can fully hedge your anticipated loss or (and this is somewhat cheaper) you can partially hedge your loss so that the money will at least mean that you are still standing financially.

If you are currently renting on the basis that house prices are going to go down, or are stretching yourself to buy one the idea that property prices will eventually resume their upward trend, a leveraged hedge bet or futures contract the other way will be a way to take out some of the financial uncertainty and protect against the worst consequences.

In the next post we will look at the alternatives for how to do this.