‘I’m sticking with my house price gamble’
And there is little anyone can do to protect their investments because of expensive exit penalties or onerous terms and conditions that prevent them getting hold of their money until plans mature.
Banks including Abbey, Barclays, Bradford & Bingley, Newcastle Building Society, Skipton Building Society and Saga are among those that have sold these bonds, which link profits to the value of the Halifax House Price Index (HHPI). Halifax itself does not sell such investments.
While the housing market was rising, these were popular investments. Abbey, for example, issued eight different versions of its bonds between May 2006 and August 2007. Newcastle Building Society, one of the biggest providers, has 23 different house price bonds, currently running.
But house price falls over the past year and the expectation of worse to come means that many investors will struggle to see a return.
Nationwide Building Society last week said house prices were down by 6.3% over the past year, knocking £13,500 off the value of the average home.
Jonathan Loynes at research consultancy Capital Economics in central London is forecasting a fall of up to 20% by the end of the year. ‘The news on the housing market in the past month has been dire,’ he says.
All forecasters agree the trend is down, but are not sure by how much (see house price predictions below). This leaves savers facing the prospect of being stuck with bonds that are unlikely to generate decent returns.
The bonds are typically structured as three, five or seven-year investments. The original capital is secure, but any interest or growth on the money depends on how the HHPI performs.
In August 2007 the value of the index hit a high of 646. Last month it had dropped to 596 - a 7.7% fall. The value for June 2008, published this week, is expected to record a further decline.
Steve Urwin, senior marketing executive at Newcastle Building Society, says: ‘We’ve been selling these products for the past five or six years. We had quite a few maturing last year that delivered spectacular returns and customers said, ‘I want one of those again.’
Investors who have already banked some good years of house price growth will probably still see a profit on their bonds.
Take Newcastle Building Society’s Property Options Bond Issue 2. This three-year investment matures at the end of this month and savers will receive 70% of any gain in the index.
The index was valued at 535 when the bond started, so even after this year’s falls, investors are on target for a modest overall profit of about 9%.
But anyone who invested at the height of the housing boom in 2006 and 2007 is facing uncertain prospects. A slump in prices lasting two or three years would leave these bondholders with zero growth.