Tuesday, February 16, 2010
Short housing
Also known a bungalow. Ba-dum-ching. I'm here all week.The Times reports, 'RBS will let investors bet on property falls' (link). It's actually been possible to do this through spread-betting for some time already. Perhaps I'm missing something, though, because I don't see the economic benefit in terms of the housing market. (There is always an economic benefit in offering goods and services which consumers want; my question is whether this one will help the housing market.)Some economists have noted that one of the problems with the housing market is that it is not possible to go 'short' housing. That is, in the stock market you can borrow someone else's stock and then sell it. In addition to paying them 'rent' for the stock, you also promise to pay them their dividends, and basically ensure that they don't notice the difference in terms of cashflow. You hope to make your money by buying the stock back at a later date and a cheaper price. This process goes towards making the market more liquid and more efficient, and provides a kind of elegant balance between buyers and sellers. It also relies purely on the existence of a market in the underlying: you don't need to create products to go short (although institutions have done so, to make the process simpler for retail speculators).In housing, you can't do that: who ever heard of borrowing someone's house and selling it again! It doesn't make sense. So unless I'm missing something, this will be a help to people who want to hedge their exposure to house prices (for some reason), but it is not going to do anything to make the housing market more efficient. The only way around that one, I'm afraid, is to reform planning. We could do worse than adopt CentreForum's proposal for a mechanism which would recoup some of the return from planning permission for local communities (link).
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6 comments:
You're not borrowing to go short. It's based on an index. So it's pure speculation on the value of the index.
One of Bob Shiller's ideas:
http://www.theregister.co.uk/2008/09/01/schiller_subprime_review/
Yes, it's the 'not borrowing' bit that's puzzling me.
Thanks for the link. It clears up a few questions. I can follow the reasoning if it's a futures market as your article says. I do agree that having a way to go short on housing will help to tame the property cycle.
The problem I have is that the way I've understood this argument, you need to have a connection to the underlying in order for the speculative activity to do its work. (Specifically, spread-betting on housing has already existed; whether that market 'called it right' is something I don't know. What we needed wasn't something to send a signal on housing, but some way for bears to pull housing back before the boom got out of control.) A futures market in specific properties would have such a connection, but a betting market on an ethereal index clearly doesn't. So what's puzzling me is how this all fits together: I'm quite open to the idea that I've misunderstood the argument!
I think you need to look at what the fundamental nature of shorting is--profiting on the decline in something's value. The particular mechanism as applied to stocks can't be directly applied to housing, but the root idea of profiting off a decline can.
(I assume we're talking about houses themselves, since you can short MBSes...Peter Schiff made a lot of money by shorting those.)
The way you do that is by renting. If houses are overvalued, rents drop below the cost of a mortgage payment, and a renter is able to build his savings. Then, when housing prices drop, he has positioned himself to profit by obtaining a house at a much lower price than those who bought during the inflationary boom, using his accumulated savings as collateral.
People who were smart and realized houses were vastly overvalued, and that building equity is not a sure thing, were renting during the last 10 years. If the government would stop intervening on behalf of the people who made the wrong bet, prices would fall, and those who bet on houses being overvalued would profit.
Another major difference is that houses aren't capital. They are consumer goods. When you buy stock, you're buying a share in the wealth that capital produces. When you buy a house, you're buying a consumer good. I think the dynamics of speculating on future price increases in consumer goods are different than speculating on the future wealth production of capital. For one, the former doesn't involve wealth creation, but rather its scarcity.
Thanks Josh, that's helpful. I easily forget to treat housing as a consumer good, which of course it is.
One thing: renters aren't short housing. We're neutral. Someone who is short housing makes a gain from decreasing house prices; that's not the same as renting. That would be like saying that someone who doesn't eat peanut butter is 'short' peanut butter.
It depends on why you're renting. If you believe a housing crash is imminent, and you're renting for the purpose of saving cash and buying a cheap house during the bust, you're deliberately profiting off a bust (profit isn't just monetary--it's anything that increases the subjective value of your living condition). Putting off a purchase in anticipation of plummeting prices is the closest thing you have to shorting a non-perishable consumer good. (Peanut butter's a bit different from houses...the next closest thing is probably automobiles, where anyone with an ounce of fiscal sense knows to never buy a new car.)
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