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Is there any viable way to offset exposure introduced by buying a real-estate (house/land)? By "way to offset" I mean financial instruments (like derivatives) that you can buy to decrease the risk of the investment, and by "viable" I mean feasible from a cost perspective.

I'm especially interested in options available for London properties, but examples from any part of the world would be appreciated!

(I asked a similar question here already; while being helpful, the answers I got was a bit different from what I was curious about)

Note: I'm looking for something that acts like a insurance, perhaps something like a put option on an index that strongly correlates with the housing price etc. I'm aware that I can't cover all risks, but was hoping for something that e.g. would have mitigated the loss by a housing bubble burst.

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2 Answers

up vote 3 down vote accepted

Yes, housing market indexes, which have associated options and futures, can be used as a hedge to cover exposure due to real-estate purchases. The most well-known (only?) indexes are the Case-Schiller Housing Indexes. They are available for 12 or more regional real-estate markets in the U.S.A. There is a website exclusively devoted to them, describing regional market coverage, index methodology and commentary, Housing Views.

Case-Schiller indexes can be used to accomplish what you asked for. You can use them as a type of insurance using the associated put options. They are listed and available for trading through the CME Group. You can get details from the CME Case-Schiller index options and futures site, including contract size, price, historical volume and so forth.

There are also global residential real-estate indices, but I could not find any obvious way for an individual to invest in them.

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You could find some companies on the LSE that make their money renting residential real estate, and then buy put warrants.

The problem with this, or any scheme, to protect you from a financial bubble is that you are trying to buy or create a "lottery ticket" that will pay off in states of the world where everyone is less wealthy. The "exchange rate" between sterling in good states of the world and bad states of the world (where everyone is less wealthy) is never going to be favorable... it is, in general, expensive to insure against bad states of the world.

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