Real estate is clearly the topic du jour, if not du siècle, seeing as how the whole economy is endlessly to be pumped up like an old tyre with property inflation.
Now here's a thing, spotted by Timmy. One of the new Nobel laureates, Robert Shiller, is an efficient markets theorist and Shiller, says our Tim,
"is certain that the housing crash was caused by not enough speculation, not too much. If there had been a futures market in housing, the ability to sell short, then the bubble would never have grown so big."How so ? Well, because derivatives would enable investors to go short, which is what is needed to correct a price ramp driven by long-only forces. In the absence of a user-friendly derivatives contract, only heavy-duty professionals can conduct shorting operations, and even they may find it difficult to create the instrument they need synthetically or by proxy. Some, we know, consider shorting as the work of the devil but they are wrong (see this exchange dating way back): the problems come when shorting is not available to all. Markets need long/short symmetry to work efficiently.
In fact, lots of people could make use of a deep, tight-spread property derivatives market - and not just speculators (though they are ultra-important providers of liquidity):
- the house owner who needs to move elsewhere for a year: if he sells in order to be able to rent, he loses his position in the housing equity market and, if there is inflation, may find it difficult to re-enter at the same level. But he can't afford the rent without selling; and doesn't want the hassle of letting his current property. He needs a property-value forward contract (if he is content to be fully hedged), or an option (if he wants to retain the upside and is willing to pay the option-premium)
- the London house owner who is moving to Manchester for five years, after which she expects to retire to the home counties. She wants to buy in Manchester but fears prices in the South East may surge ahead of those in the NW. She needs a 5-year basis swap on the SE-NW differential.
[History corner: just at the point it went bust, Enron was about to make a market in UK property indices, basis and all. It was going to buy Canary Wharf as its anchor in the 'physical' market, as a prelude to offering paper.]
The beauty of property is that loads of people are willing - only too willing - to take spec positions on both sides, which is what generates the liquidity and tight spreads needed by the hedgers. Absence of such willingness is what did for the weather derivatives market, which has never really taken off as it was supposed to do. The simple fact is, no serious punter really has a view on next summer's average temperatures.
So - good on Shiller, and roll on the liquid property-values market. And let's subject future property price ramps to the full rigour of the short-sellers.