How to survive the crash

First-time buyers should hold back

If you're a first-time buyer hoping to buy a home, there's a strong case for hanging on. After all, valuations remain historically high, so there's a big risk that you will be catching a falling knife. That's not to say bargains are not available in particular areas and in specific situations. Overall, though, the market does not offer good value.

Crash winners

As we pointed out last August, there are assets that consistently do well when the value of British houses decline. We highlighted the fact that the pharmaceuticals, tobacco and defence sectors had beaten the wider stock market during each of the previous three real-estate crises. And that's exactly what's happened this time round.

All three of those sectors have beaten the UK market as a whole since our article appeared (). Pharmaceuticals have outstripped the broader indices by 32.3 per cent, tobacco by 20.7 per cent and defence by 1.3 per cent. So a strategy of buying these sectors and simultaneously short-selling the wider stock market would have been very profitable.

Admittedly, all three sectors are down in absolute terms. This is not surprising given the ferocity of the bear market in equities during the period. Also, we said last August that tobacco and defence looked expensive by past standards, so that any gains were likely to come from their beating the market, rather than rising absolutely.

Other traditional winners that we mentioned last August have also done well. Surprisingly, general retailers, software and banks have a decent record in past real-estate sell-offs. The first two have also done well since then, although banks have clearly fared disastrously.

Going forward, we believe that the tobacco, pharmaceutical, and defence sectors should continue to outperform the wider stock market. One way to try and capture this tendency would be to take a long position in the various sectors, and a short FTSE 100 exchange-traded fund (ETF).

However, this is very much a long-term strategy, as the crash could drag on for several years yet.

Big booms lead to big busts

The bigger they come, the harder they fall. That was certainly the experience of the last housing price crash in the 1990s. The regions that enjoyed the largest gains during the good times suffered the biggest drops when the bubble burst. In the statistical sense, the size of each area's boom explained about three-quarters of the subsequent bust.

Even though the current crash has much further to go, the pattern of the early 1990s seems to be repeating itself. Those regions where prices went furthest through the roof are now seeing them come down to earth with a thud. On this basis, householders in London, the outer metropolitan areas, and the southeast of England should potentially brace themselves for even worse to come.

Crash losers

A number of traditional housing market crash losers weren't following the script at the time of our last feature. In August last year, mining, chemicals, and oil equipment & services were all riding high, despite the historic track record that we had identified. Since then, however, things have changed.

We said that if a world slowdown took hold, cyclical industries would come under pressure, and so it has proved. Chemicals, oil equipment & services, and mining have underperformed the falling stock market by 10.5 per cent, 17 per cent and 27.9 per cent respectively.

At the same time, real-estate investment trusts, real-estate investment services, and industrial transport – all of which were doing badly then – have continued to disappoint.

How the regions have performed

How the sectors have performed