The Undercover Economist - FT Magazine, 13 May
My wife and I have become hooked on the national addiction: pressing our noses against the windows of estate agents, visiting unaffordably nice parts of London and flicking through real-estate porn.
Sadly, my experience as an undercover economist offers few tips on judging what the housing market will do. I would guess that it will fall over the next few years, but you should pay no more attention to that claim than if it was made by a taxi driver or a waitress.
I don’t have enough confidence in my forecast to sell my house, rent while prices collapse, and then buy somewhere bigger for bargain prices. Nor should I. If house prices were obviously due for a fall next year we would all sell immediately and the fall would happen now instead. That is why the future of house prices will never be obvious.
Instead, I have been applying my economic toolkit to some more mundane problems: thinking about hidden costs and benefits. Renting a house rather than buying one has obvious costs, but some of the benefits are less obvious. Renting gives you flexibility, which is something that may be well worth paying for if you ever imagine (as I do not, of course) looking for a new job or a new partner.
But renting also avoids the severe cost of buying a house: tying up huge amounts of cash which could be earning an income elsewhere. Given current rents and house prices in Hackney, I could sell my home, put the money in a high-interest account, rent the house from the new owner and still have change from the transaction. Despite the large capital gains some people have made in the past decade, this housing boom will not last forever any more than its predecessors did, so switching from buying to renting hardly looks like money down the drain.
You pay to rent money in just the same way that you pay to rent someone’s house. It makes no sense to claim that one rental is wasted money and the other is not…
Continued at ft.com.
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