How and where to Trade UK Property Cycles with ETFs, CFDs and spread bets

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The past few decades saw a few investment-driven booms in the UK. None, however, was bigger than property. According to the ONS, half of UK’s total net wealth comes from land alone (£5tn). This percentage figure is the highest among G7.[1]

As UK marches into the Brexit vortex next March, is the property boom over? Just this morning  (Sep 19), ONS’s housing data shows that UK house price inflation has decelerated to the lowest level in five years (annualised 3.1%). London, in particular, is experiencing negative price growth. Even the Bank of England’s governor Mark Carney issued a ‘chilling’ warning last week. He said that, in the event of a Hard Brexit, property prices could plummet by 30 percent over the next few years.[2]

But to determine if UK’s property is over, we need a ‘map’ to understand property market generally. This map is property cycles.

Before we get into that here’s are a few options to trading UK property via ETFs, CFDs or Spread bets. Or you can compare CFD brokers here.

Property ETFs as stocks or CFDs with Saxo Capital Markets

Property ETFs available on IG as a CFD or Spread Bet

Spread betting on the UK housing market going up or down

This is one of the best things about spread betting.  You can bet on pretty much anything, the value of house prices included.

As some of these are ETFs te spread are quite wide and the market doesn’t move much.  If you wanted to use it as part of your spread betting strategy to hedge against the value of your property make sure you look into the overnight running costs thoroughly.  The financing charges may be high and the width of the spread may take a while to recoup in a stagnant market.

Property Cycles

What is a property cycle? Ask any experienced property dealers, he or she will tell you that the property market is sometimes cold, sometimes warm, and some years really hot. Ten years ago in 2008, it was freezing (due to Lehman’s failure). In other words, property markets are cyclical.

This cyclical nature is observed in many other property markets, such as US, Japan, Sweden, or Singapore. Property cycle is a feature of global property markets.

The setup of a property cycle is simple. It’s made up of Seven Phases.

Phase 1 – Inception.  A housing booms always start from this key factor: Supply-demand imbalance. Property yields are high. Speculative capital low. Demand strong; supply low. Prices go up slowly but steadily.

Phase 2 – Grows. Price growth sustained for some years. Developers increasingly confident about the future. Housing developments increase. Housing credit expands.

Phase 3 – Setback and Recovery. Corrections occur as house prices overheat temporarily. Perhaps a short recession causes price rallies to stall.

Phase 4 – Accelerated Growth. Once the economy recovers, capital returns to the property market. Those who bought in Phase 3 during a recession made a fortune, enticing others to join the game. Affordability falls, but the wider public joins the game (often via second/third/fourth homes). Access to credit becomes much easier (think Subprime).

Phase 5 – Boom and Bubble. Developers leveraged up – and build as many as possible. Average home owner leverages up. Bank credit reaches its zenith. Speculative capital – often from outside the country – bid aggressively for properties. Affordability and yields are extremely low. It’s all about capital growth and ‘flipping’.

Phase 6 – Collapse. Factors that induce a property collapse include: (a) Credit restriction, (b) Higher borrowing costs, (c) Drastic fall in real demand, (d) Cooling measures. As a result, capital flee the sector. Prices slump. Housing inventory spikes. Bankruptcies soar as leveraged players suffer massive equity drawdown. There will be ‘White Elephants’ around. Negative equity abounds.

Phase 7 – Recovery. After the supply-demand imbalance moves back into equilibrium, the market is ready for the next boom-bust cycle. This recovery may take some years, depending on (a) How big the speculative boom was, (b) How much supply in the market. For example, the Japanese property bust lasted more than 20 years (1990-2010); whereas UK’s housing bust in 1990 lasted just five years.

Where Are We Now? 

Look at UK’s average house price below. Which phase do you think the market is in now? I would say, certainly passed Phase 3 Recovery. Perhaps we’re still in Phase 4 to 5.

There is something unique about UK’s property market. It is the North-South divide. During 2008-2015, London led the boom. No longer.  It appears that capital is shifting north because prices are so much cheaper there. Growth is always easier when the starting base is low – just like London in 1996.

Hence, it is possible that London could be in late Phase 5 and some northern cities are in Phase 4. London’s property market is generally acknowledged for its (a) Low affordability, (b) Lower yields, (c) Large number of foreign buyers, and (d) Large number of housing/flat units in the pipeline.  These characteristics fit Phase 5 perfectly.

Moreover, borrowing costs are rising, albeit slowly. When rates go up, the most speculative part of the market goes down first. Also, cooling measures appears to impact the London market more than others due to higher average house price (e.g. Stamp Duty).

Overall, it is likely that UK property market is fairly ‘aged’. The last correction was a decade ago. Some areas, of course, are still experiencing price growth. But like any other bull markets, this is akin to a ‘sector rotation’ – whereby speculative capital move from one sector to another after the return potential are exhausted.

Looking ahead, I would not be surprised if UK house prices stall as the macro-economic conditions deteriorates, due to Brexit, higher rates, and affordability.

[1] Financial Times – link

[2] BBC – link

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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.

Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.

Jackson has a PhD in Finance from Durham University.