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Derivatives: Price falls expected, but not too far

Guy Ratcliffe, executive director, Morgan Stanley

Derivatives: UK residential property derivative prices dip

Although trading in property derivatives on commercial property is widely reported, derivatives are also traded on residential property in several countries. The UK market has traded contracts on the Halifax Index for many years and trading on US residential property indices started actively this year. There have also been a small number of trades on Hong Kong residential indices.

For a long period, the UK indices traded at prices that implied future growth in prices. However, during 2007 this has reversed and contracts are currently pricing in falls of up to 10% within three years. It is worth noting that these falls are still less pessimistic than that for UK commercial property, which has recently been pricing in falls of approximately 20% in capital values.

TFS UK Residential Property Derivative Futures and HPI Index

Source: TFS