It is Obvious

Chris Rick has got altogether too much to say

Archive for January, 2010

A hole in the ground

Posted by chrisrick13 on January 16, 2010

It is obvious: house prices are going to go up.

(Not sure about this one!)

I have been told I have been saying that house prices are going to go down for so long that I have become boring and have lost credibility.

We have certainly been through 3 house price ‘reductions’ while I have been forecasting it.  It reminds me of the logic when asked what is better a clock that has stopped or one that loses a second a day.  The answer is the stopped clock as it tells the right time twice a day.

I had a conversation with two of the children of a friend and told them not to buy houses.  They both did and are now in negative equity.  One of them told me that renting was lost money.  I didn’t mention that interest on a loan also is.  You don’t buy a house for investment reasons, you buy it to live in.

So what is the difference between renting and buying?  The market should balance at the point where renting or buying where you want to live is more or less the same.  If it does not then the landlord can get a better return by putting his money in the bank and sells helping to depress prices or the renter can buy for the same cost and come out of it with a house as well as somewhere to live for 25 years and buys rather than rents.

Of course the balance point is moved by other factors.  One is that house prices only ever go up so even if I don’t make money on the rent I will cash in a huge capital gain in a number of years.  My response is that you should do the maths and don’t forget to include all your costs including maintenance and all the taxes.  Another is simple greed and fear watching house prices rise and wanting to be in on the bubble.   There are plenty more.

For the person who wants to buy, the equation is simple.  Provided the bank will lend the money, if he/she can afford the repayments then they buy.  After all there is no downside and the property can always be sold to repay the loan and get the profit.  Changes in interest rates spoil that scenario.  You cannot pay the higher monthly repayments and your house has gone down in value.

So house prices will have huge pressure to follow average wages.  Interest rates determine the bangs per buck and further dictate the renters/buyers tipping point.

There are a lot of people out of work and many in work are working less hours or have taken a pay cut so this means that house prices must come down because average wages have come down.  Despite the huge premium banks are charging to base rate, interest rates are low.  So, even small increases in interest rates will bring huge increases in mortgage repayments.  If you have a £100,000 loan and are paying £400 a month in interest then a 1% increase in base rate will put the payments up to £483.  Go back to the long term average of interest rates and you are paying £800.

Apply this cost multiplier, which is coming, and the average wage drop over all people, not just those who are working (non-working people have mortgages), then house prices have a long way down to go.

It is obvious: house prices are going to go up in smoke.

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MInd you don’t cut yourself

Posted by chrisrick13 on January 9, 2010

It is obvious: cuts in government spending are coming.

Over the Christmas break I have put on 6 lbs that I know will take at least 4 times longer to take off.  I know why this is so but it does not stop me putting the weight on.  I have also written a number of entries but finally rejected them all.  So I have had a break…not.

I have watched debates over the economy turn from Labour taunting Conservatives over their cuts to a debate over who will cut the most without harming the economy.  It all sounds a bit like the arguments over how many angels can dance on the head of a pin: it is a ridiculous argument, everyone knows it’s 56.

Both parties are promising a range of cuts that will cut the deficit.  We can rest safe in our beds.  No matter who wins the election, the deficit will be cut.  Our problems are over.  Both major parties and by inference a hung parliament will cut the deficit.  A mixture of budget cuts, higher taxation, and increased economic activity will reduce the deficit to a manageable level in just a few short years.

I asked a number of people what a cut in deficit means.  They could all see it was a trick question.  I got funny looks and puzzled brows and then eventually they all agreed that it was a cut in the amount of money that was owed by the UK.

Oh dear.  Deficit cuts are cuts in the amount of debt that we run up each year, not a cut in the overall debt.  We are going to run up a whole load more debt before we get to balance.  Indeed the labour figures show an increased deficit initially.

Another move showing that you can fool most of the people most of the time.

It is obvious: cuts in government spending are coming, not enough, not in time, not believable, not likely.

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