Tenant demand in the rental market is still strong, but landlord listings have dropped significantly by 37%. This is the largest decrease since April 2020, keeping supply tight. Rents are expected to rise, with a projected +27% balance over the next three months, indicating this trend will likely continue.

Opportunity for Bearish Strategies

Recent data reveals a decline in the housing market, presenting an opportunity for bearish strategies. The RICS House Price Balance has fallen to -19%, reminiscent of the sharp declines seen in late 2023 when it reached its lowest points since the 2009 financial crisis. This renewed weakness indicates potential risks for assets linked to UK property sales. The significant drop in new buyer inquiries suggests that housebuilder revenues could be affected in the upcoming quarters. We should think about buying put options on major UK housebuilders like Taylor Wimpey or Persimmon. This strategy allows us to profit from a potential drop in their share prices while avoiding unlimited risk. The weak housing data makes it more challenging for the Bank of England regarding their next steps, especially with inflation expected to peak at 4%. Typically, rising inflation would prompt a rate hike, but these numbers may lead the Bank to pause. This is similar to how they maintained rates at 5.25% for an extended period throughout late 2023 and 2024. This uncertainty may be capitalized on by trading short-term interest rate futures, betting that the likelihood of an immediate rate hike is overstated.

Impact on the Pound

A cautious Bank of England is likely to put pressure on the pound. In 2024, when UK economic data consistently lagged behind the US, a dovish approach weakened the currency. We recommend establishing short positions in GBP/USD through futures or options as a prudent hedge against this economic instability. On the other hand, the rental market shows strong bullish potential. The historic 37% decline in landlord instructions has dramatically tightened supply while tenant demand remains high, a trend that has gained momentum since the pandemic. This signals sustained rent growth and benefits companies with large build-to-rent portfolios. To take advantage of this, we can explore call options on UK-listed residential REITs, such as Grainger PLC, which will directly profit from increasing rental income. This presents a valuable pair trade opportunity in the coming weeks. We can go long on rental-focused assets while simultaneously shorting those linked to the struggling for-sale market. Create your live VT Markets account and start trading now.

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