Bankable Frontier Weblog

“NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust?” 

This was the somber question asked by an Economist article of 16 June 2005. An even more recent edition of The Economist (8 September 2005) updated its global house-price indices and, in the face of slowing increases elsewhere, drew attention to the still ‘red hot’ US housing market: prices here rose 13.4% in the year ended June 2005, the largest real increase in US property prices on record.

Other than China, South Africa is the only emerging market tracked in the Economist house price indices. The year on year increase there of 21.4% was the second highest in the world, as the local press picked up (see Business Day article ).  The major local mortgage lender, ABSA Bank, was reportedly tightening its lending criteria, after observing that the bought to rent component of new residential property developments was now typically 20%; rather than the normal 5%. As the Township Residential Property Markets project found last year, this frothiness in the property market is limited to the suburban property markets: resale markets do not work effectively in urban township areas for most of the one in five South Africans who live there.

Is your house hedged? Hedge Angel House, Emma Butler Gallery© 1999 - 2005

Not surprisingly, fears of the property bubble bursting have led to innovation in retail financial products available to home owners who wish to reduce their downside from price falls. The Wall Street Journal of 17 September 2005 carried an article on “New Tools to Hedge your Home”. Firms such as Merrill Lynch now offer futures contracts linked to house prices, which allow home owners to hedge in part against possible house price falls. The Chicago Mercantile Exchange is developing futures contracts linked to indices of house prices in various cities. The firm HedgeStreet offers Hedgelets as a way to bet on the rise or fall of house prices in six US metro areas. The Wall Street Journal reports that contracts expire quarterly, so there is at present no ability to hedge long term; and there is little liquidity in the contracts.

Nonetheless, these early movers signal that there is likely to be a lot more financial innovation in this space. In general, I welcome the application of sophisticated financial technology to enable ordinary people to manage their every day real risks, which have not been covered by traditional mechanisms of insurance. Economist Robert Shiller has long pointed out this glaring gap in traditional insurance product coverage. However, I would welcome even more renewed efforts which enable the urban poor in most developing countries to unlock the value in their houses, through the development of effective resale markets. That would be worth celebrating indeed.