It is Obvious

Chris Rick has got altogether too much to say

‘Ere guv, wanna cheap castle?

Posted by chrisrick13 on November 12, 2013

It is obvious: a fool and his money are soon parted

I just read an article on renting versus buying.  In summary over a long time it concluded the costs of the two are very similar.  In the short-term a house will take a lot more of your cash than a rental.  The risks associated with each are very different.  You really have to get your timing right with buying and selling and you need to be very sure that you can afford the mortgage over its life.  If you own a house and it sucks the maintenance money out of you then at least you will have something close to what you want.  Of course if you rent you can always move on if you don’t like it.  One benefit I might well have had would have been that if I had rented I doubt I would have accumulated nearly so much stuff.

If all things are considered then the rental versus buying costs ought to be similar because if they weren’t then demand for one or the other will go.  As a landlord there has to be a profit in it or there is no point doing it which pushes the equation around a bit.  This has to be factored in and is a reason why there are council houses.

Last night there was a short programme on the housing bubble.  I had to watch it.  The government minister stood there and steadfastly denied a bubble while every other expert warned of one.  There was the observation that building lots of houses and bringing prices down by over-supply was much kinder than making mortgages affordable to people thereby pushing prices up.  These are people who can barely afford the mortgage with base rate at 0.5%.  One new buyer said that she was completely unaware that the current interest rate was the lowest it had been in 200 years.   When she was told that the long-term average was 9 times the current rate she just stared at him.  I was unsure whether it was shock or she just did not understand what the interviewer was talking about.

The programme also showed people queueing outside a house to view it on a Saturday before putting a bid in for the Monday when it sold for £75,000 more than was being asked.  Do you remember that sort of thing happening before?  I do – twice.  I also remember what happened soon after.  I remember what happened with Dutch tulip bulbs in 1637 as well.

I have advised that you should not buy a house at the moment, however if you have one then keep it as a store of value over any rest that occurs.  If I thought I could get the timing right I might sell my house over the next few months with the intention of buying back in when the bubble bursts.  However if that coincides with vastly increased inflation then there might not be any timing possible that is ‘right’.  This is a consideration where you are close to deciding whether to put you house on the favourite at Lingfield in the two thirty or not.

What the programme showed me was increases in house prices that are starting to get a lot of people out of a nasty hole.  They are in houses that they could not sell as they would have to put money in to make up for the drop in value against the mortgage: negative equity.  There are others in a similar nasty hole.  They have to take whatever deal their current lender offers them as they do not have enough equity to go to another lender and negotiate a good deal.  In similar fashion there is another group who if they sold would not have enough equity to put down on another house and get a mortgage.  The government scheme bumps up their deposit and helps them pay more for another house.

The people getting out of their holes are being replaced by a lot of people who are starting at the bottom of an already quite deep hole.  Just a 1% increase in base rate will make it deeper and fill it with water.  That 1% increase, like bubbles, is further away than you can possibly think but it is coming.

It is obvious: a fool and his money are soon parted but how on earth did he get it in the first place


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: