One of the benefits of the downturn in the housing market that we have seen here in the UK over the past 2 years or so is that dinner party conversation has evolved. No longer are we forced to sit at a table while couples compete over the mortgage deal they managed to wangle nor the increase in value of their pad in that up and coming area that nobody yet knows about. Their braying bravado was replaced at first with plucky optimism and now is conspicuous in its absence.

The housing market has seen a bit of a recovery recently. Prices started to rise in the late part of last year as buyers snapped up bargains and supply began to open up. Prices in London in particular have snapped back to levels reminiscent of the early bubble days. Of course, given the correlation between the housing market and the overall mood of the public, a housing market uptick leads to increased confidence, spending and employment. The benefits are truly universal.

But fears over a double-dip in the market have, alongside other reasons, stymied the pound in recent weeks. The influential Ernst & Young Item Club have predicted that house prices will fall 1.4% over the course of 2010, the NIESR by just over 1% and they are not the only ones. Figures released overnight showed that prices in the UK rose by 0.1% in March, a record low for this time of year.

There is some good news for those moving within the housing market over the coming 12 months. Interest rates are likely to stay low for a good while now as the Bank of England and the financial sector as a whole try to encourage borrowing and consumer spending. We don’t forecast interest rates will rise in the UK past 2.5% for at least 2 years.

Mortgage approvals however remain depressed with January’s figures half those in December. Most of this can be blamed on the cessation of the stamp duty holiday with the largest falls seen in the £125,000 and £175,000 bracket; the traditional haven for first time buyers.

I doubt we will see housing strength in the UK in 2010 and the prospects for 2011 hardly look ideal. Sterling will have to wait for a while until it can rely on the housing market to help its progression higher. At least dinner will continue to improve.

Trade of the week

This week’s trade of the week is the simplest option available and therefore the hedge that gives the client the most freedom possible. The ‘Vanilla’ is the building block of the options world and is one of the most popular trades in the market at the moment.

The buyer of this trade is an importer based in the UK and bringing in goods from France and the Netherlands. He wanted to protect a GBPEUR rate of 1.08 for the next 6 months. The client believes that sterling will gain against the euro over the course of 2010 but must at least get a level of 1.08 to keep his margins unaffected. This cost the client only 0.75% of the notional amount (the amount hedged). For that he receives 100% protection at 1.08 and every piece of upside forthcoming i.e. should GBPEUR be trading at 1.17 on expiry the client would receive 1.17.

This offers the client the most amount of freedom to benefit possible while still being protecting a rate that benefits his business. This works on all currency pairs and is available to both buyers and sellers of sterling.

Have a good week.