...or perhaps not buying a house after all

[ciphergoth]

...at least for a while.

Met up with babysimon at BU last night. He made a *very* persuasive case that now is not a good time to buy. Various folk made the opposite case, but his was backed up with detailed quantative historical data. I'm sore about it, but I'm convinced. It's sad but at least it means I'll be able to get a rather better property for the same money when the crash comes.

Just spoke to an investment advisor, who said if I was only investing for a year or so and then hoping to buy property, I should put my deposit in bonds. I'll also of course put the maximum I can into an ISA. It'll keep 'till I need it.

So I guess I'm looking to rent once again... but we're not in a hurry.

Comments

my turn :o)

[ajva.livejournal.com]

brief recap of current situation re: interest rates setting (in case anyone doesn't know):

Interest rates are set by the nine-member Monetary Policy Committee of the Bank of England, who meet for a two-day meeting on the first Wed and Thurs of each month, and then vote on it (if you log into the bbc website on the first Thursday of each month, the results tend to be top of the business page at about one minute past noon - my bet, FWIW, is that they're going up to 4.25% next month, although it might be May). They have a remit to keep inflation between certain limits defined by the government. There is no penalty for failing to do this, but if they go outwith these limits then the chairman (Mervyn King) has to write a letter of explanation to Gordon Brown. The government still retains a measure of control over policy, you see.

In practice, interest rates are a very crude monetary tool. It is like having only a sledgehammer to open a peanut, when there are loads of other peanuts around you're trying to avoid touching.

The MPC may be forced to raise rates for reasons totally unconnected with the housing market. For example, if consumer spending continues to run away with itself, then rates have to increase to keep the inflation figures within the preordained limits. Another thing that we could possibly see in the foreseeable future is a classic sterling crisis; the pound is very (many say unhealthily) strong at the moment, but what happens if it suddenly drops more than is healthy, and quickly? Rates will have to go up to support it.

There is nothing special about inflation as the target for the MPC's deliberations. That is just the hook that monetary policy is currently slung on. For example, in the 1970s it was the money supply figures that economists and treasury boffins waited for each month with baited breath; ideas change, and there are fashions in economics as in anything else. At any time, the government could change its monetary ideal to something else other than low inflation. In fact, it could be argued that with increasing government debt not only in this country but also in the US and in other rich economies, it is in the interests of governments everywhere to inflate away their debt. Alan Greenspan will certainly choose higher inflation rather than deflation if caught between those particular rocks and that particular hard place. There are signs that this is happening already; the Federal Reserve has been printing enormous amounts of new dollars for the past couple of years. This is probably one reason for the recent slide in the dollar (although there are more of course).

Anyway, to get back to the point (sorry). The MPC is worried about the housing market, but it is not their primary concern. They are well aware that a housing crash would have a major effect on the economy as a whole, and it is in *this* respect that it impacts on their job. They are committed to raising rates slowly but steadily over the next year or so, in an attempt to deflate the bubble - but it may already be too late. They cannot just let the housing market get on with it. There is too much speculation; too much of people financing the purchase of a house with the equity of another (anyone remember the split-cap scandal?); they're very, very nervous. But the pound can't get too strong, or manufacturing suffers. Rock. Hard place.

There is an argument that rates moving from 3.5% to 5.25% would have a similar effect on our housing market to rates going from 10% to 15% (both being +50%). Of course, the counter-argument is that when rates are high, a higher proportion of a mortgage payment is made up of interest than when rates are low. But then, in a market where the only way more and more people can afford to buy a house is through getting an interest-only mortgage and skimping on the repayment vehicle...

Remember it is not the people who bought ages ago and are safe who set the market level, but the financially challenged, the people who will take a cut just to sell etc. etc.

But then, don't mind me - I am the uber-bear. I promise to shut up now. :o)

Re: my turn :o)

[ciphergoth.livejournal.com]

I promise to shut up now.

Please don't feel obliged - this is one of the most important decisions of my life, and I really value the work everyone's putting into informing that decision.

Re: my turn :o)

[ajva.livejournal.com]

Well, the problem for me is that I can't time the market, and although I wouldn't buy now myself, I don't want to risk fucking up your plans by being too bearish.

There is a famous quotation which is attributed to John Maynard Keynes which goes:

"The market can stay irrational longer than you can stay solvent."

By any measure, the London property market is seriously overvalued, and although I think it's going to crash, I cannot guarantee that I am correct that it will happen soon. I would just point out that, if interest rates do go up to 4.25% next month or in May, then that will be the highest base rates have been since October 2001.

This would mean, for example, that people coming out of 2-year fixed rate deals are less likely to be able to get a cheaper remortgage than they have been for the past 3 years.