Over at Labour & Capital (who I've noticed has been kind enough to add me to his blogroll) a post about shorting that ended up in a discussion about the potential for shorting on housing. Nick Drew likes the idea and suggests some kind of market for housing, personally I'm not so sure, firstly because Nick is right wing capitalist type and second because I'm not sure it would give any great benefit.
First, I'll have a crack at how such an idea might work (this is unknown territory for me so it's just a guess). Obviously we can't go buying and selling bricks and mortar so I'm thinking a system of vouchers, the value of these vouchers tracks a housing index (so £1,000 of vouchers when average houses are £100,000 would translate to £1,500 worth when they are £150,000), a governing body redeems these vouchers against the purchase of a house and regulates the market and participants buy and sell contracts and options on these vouchers.
The relationship between such a virtual market and a housing market would not be exact, but likely to follow in roughtly the same vein, the market could drag prices up or down because it would reflect what housebuyers who participate in the market would be prepared to pay. It would go up and down with the housing market although there's likely to be some level of difference.
Regardless of whether my little setup above is on the ball or not, the big problem with the market is that it would allow additional participants not really interested in speculation more than bricks and mortar. The injection of speculative capital in the housing market would almost certainly drive house prices up generally, further to this if behavoir in other markets is anything to go by, we can expect this speculation to drive pro cyclical behavoir.
It seems to be an instinctive thing among city types that they seem to think inside a box that views a market as a solution to almost any problem. The problem seems to be that the most active participants are are likely to be middle men looking to make money rather than genuine producers and consumers. As I understand things, this kind of behavoir is exactly what happened in the oil and commodities markets driving up prices beyond actual realistic levels.
I would question whether we really need this kind of financial innovation and whether it ultimately gives any great benefit that could not be addressed created by other means. To me the idea of creating a new market for housing seems like more trouble than it's worth, further to this, I do wonder whether same is true for some of the other more exotic markets.