By next year Australians will be able to bet on the direction of the housing market in the same way we take positions on whether the share market will swing up or down.
This week the Australian Securities Exchange teamed up with property researcher RP Data and its partner Rismark International to develop a residential property derivatives market.
Such markets exist in Britain and the US, and now a similar market will be launched and traded on the ASX using the RP Data-Rismark indices.
These indices measure house price changes using the Hedonic method, which takes into account the attributes and characteristics of residential properties, such as location, land size and number of bedrooms, to measure "quality-adjusted" changes in property value over time. Many investors buy property because they perceive it to be a simple investment. You do some research, choose an area, buy something you can afford and you can drive by your purchase and see it.
Equally, many buyers have been shut out of the market because of the big dollar commitment a property purchase requires.
Rismark says a residential property derivatives market has the potential to allow individuals and institutions to get cost-effective exposure to the $3.2 trillion residential property asset class.
Rismark executive director Ben Skilbeck say that such a market could be used, for example, by first home buyers, who until recently found trying to save a deposit almost impossible because price rises meant they never accumulated enough of a deposit amount.
For example, a home buyer trying to save, say, $100,000 for a deposit may take five years to save that amount.
However in five years' time, he or she may need $140,000 if prices are rising.
A contract tied to prices in the area in which a buyer is looking could help keep pace with increases and provide that extra $40,000.
Skilbeck says derivatives can even be linked to savings accounts and so the effective rate of interest on an account is whatever the performance of the selected property market is.
In Britain the residential property index is called the Halifax index and the US index is called Radar Logic. The markets in the US and Britain are busy at the moment, Skilbeck says, because it's in volatile times that investors and institutions use derivatives.
Derivatives are financial instruments that get their value from another financial investment, in this case property prices. Examples are options, futures and contracts for difference.
They are used mainly to manage risk and potential investors do need to understand that they are not investing in the underlying assets, but rather in the performance of a particular market.
The format, and the range of indices and products offered for the Australian residential market are yet to be worked out. And while the proposal has the advantage of being able to offer exposure to different capital city markets, investors should remember that some derivatives products are considered risky.
Contracts for difference, which are banned in the US, have been described by the Australian Securities and Investments Commission on its website as "like borrowing to gamble".
"You take a punt, with borrowed money, on whether a share price or market index will go up or down. You may be able to borrow up to 95 per cent or more of your bet," ASIC says.
"Because of this borrowing, it's much riskier than a flutter on the horses or a night at the casino.
"Your losses are potentially unlimited and can far exceed the money you've wagered."
