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Wednesday, October 26, 2011

Fools gold...?

I was jogging along listening to my Ipod and just starting to flag when on came the banging beats of the Stone Roses classic 'fools gold'. Anybody listening to the news last week couldn't have failed to be aware that the 90's phsyco dance manc rockers are back!

Anybody investing in the financial markets will also be aware of the fantastic performance of the real stuff as gold prices have doubled, tripled and then doubled again. The reason? People are scared. The fear and flight to safety has propelled the value of the precious metal ever higher.

This made me to reflect on the performance of residential property over recent years. Has property prices benefited from exactly the same impulses propelling the gold price to record highs? The more scared people get. The more they shy away from the complicated financial assets that most of us don't understand and towards straight forward 'bricks and mortar'.

Good times - bad times

So in good times property values go up because we feel good and want a nice new house to show off to our friends and family. In bad times we buy because it's seen as a safe bet. Look at the way the London market has continued to boom event during the 'down turn'. But does this make investing in property 'fools gold'. Is the day of reckoning imminent when an almighty correction brings housing crashing down to an affordable level more and in line with our straighten times? Any body following the financial press will have seen the recent Knight Frank report pointing to lower house prices.

I don't think so - but for now let's get out those baggy trousers and keep on dancing to the real thing! 'What doya reckon?'

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Paul Barrett said...

The only people who can afford to sell is if they have lots of equity or lots of deposit money for a new purchase.
Therefore property prices will not reduce; only the desperate will sell at such low prices.
Nobody is going to take the hit; what they will do is become an a'accidental landlord' and go and rent where they want to be.
For desperate read divorce; death, separation etc.
Normal people will just improve their properties rather than move as it would be prohibitively expensive; stamp duty, conveyancing charges etc.

Anonymous said...

Paul is correct though he ignores one vital factor which is interest rates. Lower than previous recession interest rates and share volatility mean that investors choose to sit out the stocks and shares market and rest on Bricks & Mortar. Interest rates are set politically low at the moment to bail out the borrowers. If the BoE raise interest rates to economic norms any time soon to counter inflation the property market consume itself.

Paul Barrett said...

Yes I do agree with your contention; however the UK economy will remain bad for many years and politically no government will increase interest rates as the effect on house owners will be massive.
There would be masss repossessions as wages won't be sufficient to support mortgages and it doesn't matter how cheap property will get the huge deposits required and lenders not lending would just leave loads of unsold property.
Even BTL investors couldn't soak up all the property.
Also where will all those former homeowners be housed.
There isn't enough rent accommodation at the moment.
We can all suffer inflation; it just means a reduction in living standards which is just tough; but cause people to lose their house causes a whole load of other problems,
Also leaves the banks with massive negative equity with no poosibility of recovery of shortfalls from former homeowners.
No interest rates won't be going up for the next 5 years.