Now is a good time to buy your own home, particularly because so many people think it isn't.
If you buy your own home now it's likely to reward you in the long run with a reasonable return, regardless of whether prices fall in 2011. You don't need great maths skills to see that, but you need to understand some basic economics whilst avoiding flawed attempts at advanced economics.
We're too primitive for forecasting
Economists know how to measure economic growth or to put a price on goods we want to sell. That's basic economics. Forecasting is advanced economics – so advanced in fact that professionals are still clueless about it. It's (just a little) like we can do science but we still can't see dark matter properly or travel at the speed of light.
Every now and again I write about how the latest batch of property forecasts has worked out, not just for a laugh, but to show that it's impossible to keep guessing right, or even to get it right most of the time. I record and track every forecast I can find and I'm yet to find a professional or amateur who calls it right consistently.
Forecasts lead to irrational buying decisions
Hesitant buyers following the prediction that property prices are to fall 5% over the next 12 months will lose out if prices stagnate or rise. They might get lucky, but with our inability to forecast reliably, that would be all they were: lucky. Not skilful.
Too often, supposed experts say ‘house prices are difficult to predict’ but then go on to give a prediction. You don’t need me to tell you that this isn't rational. If house prices are so difficult to predict, forecasts shouldn't play any part in our decision-making processes, and we should use more rational reasons...
Buying with a massive margin of safety
The long-term history has shown a trend of rising prices. Even without forecasting what's going to happen in the next year or ten, that supports owning over the long term.
Yet it gets a lot better. A few years ago I spent an hour or two working out purchase costs and average amortisation rates, versus very conservative measures of rent inflation, with the aim of working out the economics of owning versus renting. Words like 'amortisation' may sound flashy to you, but I assure you this is basic economics, i.e. we really know how to do it. What I found was that even if prices were to fall over 25 years, you'll still likely end up better off over the long term than if you had rented.
John Fitzsimons looks at the dos and don’ts of arranging a mortgage over the internet.
The reason is you have a massive margin of safety. Your mortgage payments are likely to gradually go down compared to rental payments in equivalent properties, because rents tend to rise gradually over time. Your mortgage payments will rise and fall with interest rates, but the compounding effect of rental inflation is likely to far exceed what a buyer might expect to pay overall, even if there are periods of high interest rates. If you'd rented, you'd have likely paid the same or more in rental payments.
The margin of safety doesn't end there: eventually you'll stop paying the mortgage altogether. What's more, your property might be worth less than when you bought it, but you’ll own it outright, as an asset. Someone who rented will not own anything at all.
The main question is affordability
With that in mind, the main question for me is whether you can afford to buy now. It's sensible to base your affordability calculation on the unlucky scenario that interest rates will rise high and soon, but thankfully there are calculators that can help you do that. (I'm a fan of the ten-year fixed-rate mortgage at current prices. Read how I come to that conclusion without resorting to forecasts in Now is the time to get fixed mortgage deals.)
Waiting may mean that the property becomes unaffordable to you. If it's affordable now and the economic return is likely to be high enough, it's not a bad time for you to buy. (As an irrelevant aside, if you can't afford it, that could well be a sign that prices are too high. They certainly are for you.)
If you want some more encouragement, it's been calculated recently that affordability for first-time buyers is better now than at any other time in the past 12 years. You can ignore the economics of that and hold on for more affordability if you want, and maybe you'll get it, but you're taking chances.
Let's keep this short
It's not all about affordability. As all readers of lovemoney.com know, you need to consider personal circumstances, such as if you are willing and able to stay in the property for many, many years in the event that falling house prices in the short term make it impossible to sell. But don't let me go on about that; you know your personal circumstances better than I do.
If you're needing one more argument, here it is: it's wonderful to buy with a clear head at a time when everyone else is making gloomy forecasts – especially sellers.
At present the market is uncertain and there are fewer buyers, and many think prices are going to fall in 2011. That's a good environment to be a buyer, especially an energetic one. It's a time to make lots of viewings, and offers way below the asking price. You're more likely to result in a lucky strike at times like this. Not as much as in early 2008, when people were getting properties for more than 40% off the asking price, but there are bound to be plenty of desperate sellers. Use their forecasts against them.
Read The cheapest places to buy property in 2011 for more tips.
Always think rationally
The question you might be asking yourself is “How will I feel if I buy now and prices fall in the short term?” Well they might. Ignore it. It doesn't matter what other people are willing to pay for your house one year after you bought it. It only matters what they are willing to pay when you need to sell, which is presumably a very long way away.
What everyone else pays for their properties is also irrelevant, so long as you're happy with the price you've paid and that it gives you a reasonable return in the long run. The return being falling accommodation costs followed eventually by no accommodation costs, and ownership of a six-figure asset.
What do you think?
I would predict that many of you will disagree with my view on house prices, but it would be too easy to get that forecast right.
But whether you agree or disagree, I’m interested in what you have to say. Let me know your thoughts using the comments box below.
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