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getdoon_weebobby

Moneyweek Starting To Indicate A House Purchase Wouldnt Be Too Bad An Inflation Hedge....

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http://www.moneyweek.com/news-and-charts/e...Money%2BMorning

How to protect against inflation

May 21, 2009

"I have a guilty secret that may come as quite a surprise…

You see, I like to think of myself as perhaps the most bearish contributor on The Right Side, but I’ve just done something extremely bullish with my own money.

I’ve taken the plunge and am wading into the property market.

I’m in the process of buying a place in Wimbledon in this housing bear market. Is this my attempt to call the bottom? No. Do I now think the woes of the British economy are behind us? Good Lord no!

Believe it or not, I’ve bought the place because I like the area and want to live there.

Of course, with the expense of buying it’s impossible not to think about the financial commitment and, in time, I predict it will be a good investment. In a lot of time. For now though, I’m pleased as punch. The reason for this is because my monthly outgoings have been cut in half. I’ve taken on a mortgage at an absurdly low rate. A rate that I fixed for as long as I could.

Why?

Because I believe that we are going to enter a period of massive inflation leading ultimately to sustained rate rises. And I’m not the only one. The Telegraph’s Liam Halligan is at the fore of the pro-inflation crowd noting that in the Bank of England’s recent inflation report, “It has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary.”

That means that in the long run there is only one way for rates to go. Up. Indeed, it is time for us all to be protecting ourselves from the spectre of inflation. If you’re not buying a house there are other ways to protect yourself. But first, more on the debate…

Inflation or deflation?

As my colleague Bill Bonner recently put it, “Zimbabwe or Japan, that is the question.”

In the Japanese corner are the deflationists. They believe the UK economy is heading into a spiral of lower output causing job losses, price cuts and wage cuts, ad infinitum. It’s a very ugly problem that is the stuff of Mervyn King and Gordon Brown’s worst nightmares.

In the Zimbabwean corner, are the inflationists predicting that our policy makers’ desperate and relentless bailouts and buy-ups will “put cash in the hands of those who might spend it”. And that is inflationary.

There is merit in both arguments, however it is only the inflationists that have momentum behind them. You see, it is the express wish of the government that we have a return of inflation. It’s what quantitative easing is specifically designed to create. Deflation is a worse problem than inflation and a deflationary spiral would be crushing for the economy so the government is taking every step it can to prevent it. They are recapitalising the banks, cutting interest rates, putting spending money into the hands of pension fund managers by buying their bonds, giving £2,000 to consumers to go and buy cars AND helping the same poor consumers buy a house through the HomeBuy Direct scheme.

It’s all inflation-stoking and the real question is when, not if, it will take hold.

What to do when inflation kicks in

When thinking about how to protect your wealth and profit from this coming storm, first think of the consistent hallmarks of a high inflationary environment:

Food, petrol and your energy bills all get more expensive. The interest rates tend to shoot up as well.

To address rising asset prices, invest in stocks and hard assets like gold. Stocks are a good counterweight to inflation as they have the potential to appreciate in value greater than the rate of inflation. Meanwhile gold is a true store of wealth that is not devalued by inflation.

And with rising interest rates – the Bank of England’s conventional monetary response to high inflation – you would do well to sell any bond holdings you may have. Receiving a fixed rate of interest is not wise when the official base rate rises. It makes bonds less and less attractive. Conversely it makes having a low fixed-rate mortgage more attractive, but I’m not here to gloat.

Of course, property is also considered to be a good inflation hedge. Here’s hoping…"

Edited by getdoon_weebobby

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http://www.moneyweek.com/news-and-charts/e...Money%2BMorning

I have a guilty secret that may come as quite a surprise…

As my colleague Bill Bonner recently put it, “Zimbabwe or Japan, that is the question.”

Of course, property is also considered to be a good inflation hedge. Here’s hoping…

You work with Bill Bonner? really?

I agree with your general thesis, but there are other inflation hedges that don't have the disadvantage of being hugely overpriced.

Edited by auk

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http://www.moneyweek.com/news-and-charts/e...Money%2BMorning

To address rising asset prices, invest in stocks and hard assets like gold. Stocks are a good counterweight to inflation as they have the potential to appreciate in value greater than the rate of inflation. Meanwhile gold is a true store of wealth that is not devalued by inflation.

And with rising interest rates – the Bank of England’s conventional monetary response to high inflation – you would do well to sell any bond holdings you may have. Receiving a fixed rate of interest is not wise when the official base rate rises. It makes bonds less and less attractive. Conversely it makes having a low fixed-rate mortgage more attractive, but I’m not here to gloat.

Of course, property is also considered to be a good inflation hedge. Here’s hoping…"

stocks did well in the 1970's high inflation did they

honestly how do these people get jobs

granted in hyperinflation stocks will do better than paper

essentials will do far better though

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if you have the money, why not. Problem is, most people dont have the money, they have to borrow it. When the interest rates go up, all the lenders are going to get bent over a barrell unless they up their interest rates.

Right now you can borrow at a good rate for a few years, but your at the mercy of the lenders once your rate deal ends, and could be at the mercy of high inflation for the remaining 90% term of your mortgage.

House prices are like bonds, in that when the interest is low the price is high, and when the interest is high the price will be low.

I think I would rather buy when the interest rates are 10% because the price will be very low.

I also think homeowners are going to get a new tax to help pay for the mess the country is in. So, yes, I would like to own a house, but not at crazy prices.

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You work with Bill Bonner? really?

I agree with your general thesis, but there are other inflation hedges that don't have the disadvantage of being hugely overpriced.

Getdoon is quoting the article, he just didn't put quote marks.

I think the author is extremely misguided: Sure, houses will make an inflation hedge WHEN THEY START APPRECIATING IN NOMINAL TERMS. But not until. While house prices are falling, every day you wait buys you more house for your cash.

One can buy a house at a few days notice so why buy now when prices are falling in nominal terms? Why not wait until they show a sustained appreciation in nominal value, thus indicating that a bottom has been reached?

Yes by waiting you may miss the trough by, say, 5-10% in nominal terms. But by buying prematurely you may buy at a nominal 50-80% above the trough!

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If that was Merryn or John Stepak or James Fergusson writing that I would be alarmed.

Note that it is an article which has appeared elsewhere and they are simply reprinting it.

In this week's edition, and the previous weeks, MW has been saying that HPs have much further to fall because of the underlying weakness of the UK economy - unemployed people do not buy houses, people in fear of losing their jobs do not buy houses.

So, who is this Theo chap then? Did anyone read the byline?

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If you really believe that inflation is on its way (more than the market), you could buy zero coupon inflation swaps. This is a pretty pure way of "buying" inflation.

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I guess while property still has a long way to go down, mortgage rates have reached bottom, so it 'could' make sense if you're able to fix long term and negotiate a big (30%+) discount to bring prices down to 2000/2001 levels. All the fundamentals point at prices falling further though.

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I guess while property still has a long way to go down, mortgage rates have reached bottom, so it 'could' make sense if you're able to fix long term and negotiate a big (30%+) discount to bring prices down to 2000/2001 levels. All the fundamentals point at prices falling further though.

How many sellers are going to accept an offer 30% below their asking? I doubt anyone would.

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Moneyweek Writer Buys A House Because He Wants One, Then Tells Us To Buy Gold....

Fixed that for yer ;)

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A hedge is all about reducing risk.

The highest-risk thing you can do is buy on (high) leverage.

Therefore buying property is most emphatically not a hedge, unless you're a cash buyer.

Note: this has no bearing on whether it's a good, bad or indifferent investment, let alone somewhere to live considerations.

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Like most contributors here, I believe that property prices need to come down relative to people's incomes.

But I do accept that there are reasons why prices might not crash as much as I want, seeing as how I would like to buy somewhere.

1) Low interest rates. All asset prices should be inversely proportional to interest rates. If you can fix your rate today, say for 10 years, you can end up buying a property that is undeniably a hedge against inflation, and your total outgoings are likely to be very low indeed. The risk is that there is no inflation at all over the next 10 years, and that the capital repayment side of the house buying equation becomes a huge burden.

2) Immigration. I have heard stuff about people leaving the UK. Truth is, things arent as bad here economically as they are elsewhere. Sure, some must be leaving, but I would guess that we still have net immigration, adding to demand for housing.

3) Quantitative Easing. Will encourage those worried about inflation to buy housing.

4) A weak Pound. Will stimulate our economy, allowing more people to find the money to buy a house.

Against this we have a collapse in bank lending, plus our economy is in recession, it is only doing well compared to some basket cases like Japan, Germany, Ireland, the US, Eastern Europe, gosh come to think about it almost everyone except India.

The real kicker is interest rates. If QE works, and the Bank of England are able to fill the gap in money supply left by the near deflationary collapse last year, then interest rates will have to rise. That will make homes less affordable, and price falls will follow. But who is to say that interest rates will rise? Wish I could say that, I want it to happen, but I just dont know.

At least the reduction in bank lending should help prices to fall back. That seems to be the one certainty that all of us hoping for major house price falls can rely on. Will it be enough?

Looking in the Estate Agents window near where I live is depressing. It doesnt look to me as if there is a crash on just yet.

Come on bond market, fail to buy all those gilts!

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Come on bond market, fail to buy all those gilts!

Put on your sparkly red high heels, click them together twice and say after me "Come on bond market, fail to buy all those gilts!".

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if you have the money, why not. Problem is, most people dont have the money, they have to borrow it. When the interest rates go up, all the lenders are going to get bent over a barrell unless they up their interest rates.

Right now you can borrow at a good rate for a few years, but your at the mercy of the lenders once your rate deal ends, and could be at the mercy of high inflation for the remaining 90% term of your mortgage.

House prices are like bonds, in that when the interest is low the price is high, and when the interest is high the price will be low.

I think I would rather buy when the interest rates are 10% because the price will be very low.

I also think homeowners are going to get a new tax to help pay for the mess the country is in. So, yes, I would like to own a house, but not at crazy prices.

By holding off you would also have the advantage of knowing whether the inflation was helping the affordability situation by inflating wages or putting your own and the majority's balance sheets into a terminal tailspin.

There is a massively growing backlog of repos that have been held off for McStalin's electioneering stunt. The BTL sector is joining that logjam, there could be much more carnage in rentals if wages fall in real terms and inflation knocks out existing renters ability to just pay the bills,get to work and function in the economy.

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http://www.moneyweek.com/news-and-charts/e...Money%2BMorning

I’ve taken the plunge and am wading into the property market.

Because I believe that we are going to enter a period of massive inflation leading ultimately to sustained rate rises. And I’m not the only one. The Telegraph’s Liam Halligan is at the fore of the pro-inflation crowd noting that in the Bank of England’s recent inflation report, “It has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary.”

That means that in the long run there is only one way for rates to go. Up. Indeed, it is time for us all to be protecting ourselves from the spectre of inflation. If you’re not buying a house there are other ways to protect yourself. But first, more on the debate…

Inflation or deflation?

If interest rates rise, this would ultimately cause more reposessions, and an exodus of BTL, and less purchasing ability for most people, leading to lower house prices. Buying now BECAUSE interest rates will go up in future sounds bonkers to me.

Unless, of course, you think they'll go up by just enough to make your own mortgage payments more if you wait, but not enough to crash the market? Yeah.. right...

Inflation hedge - fair enough, but if everything else goes up how will you afford the mortgage?

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It makes no sense to worry about "very high" interest rates if you are financially very comfortable.

If you are lucky enough to be financially comfortable then it is unlikely rates can go high enough for long enough to really cause you financial pain as most of the UK is probably in a weaker position than you and would be crushed by a rate that would only cause you a temporary annoyance due to having less cash to put towards your pension/savings/ISA allowance etc.

That is my reasoning for not worrying about interest rates. A rate that would hurt me would crush the country. I'm not rich but I've been good with my money and have large amounts of savings/a stable, much higher paid job than national average (but still can't buy a house up to my high standards), and a property which is currently rented for 1450 pounds a month but has a mortgage of 330 a month. I don't know how many other brits can say they are in a similar position (probably a lot more on HPC than the average population) but I doubt it is a anywhere near 20% or so.

I also don't see how hyper inflation can come about in the very near future based on the same logic. If I can't buy the stuff then nobody can.

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the numpty that wrote that article for Moneyweek should look at what happened to property values in Weimar.

Moneyweek have lost some cred with myself personally today for having that article online.

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the numpty that wrote that article for Moneyweek should look at what happened to property values in Weimar.

what happened? House prices would have massively inflated I would have thought seen as a roof over ones head is essential.

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A hedge is all about reducing risk.

The highest-risk thing you can do is buy on (high) leverage.

Therefore buying property is most emphatically not a hedge, unless you're a cash buyer.

Note: this has no bearing on whether it's a good, bad or indifferent investment, let alone somewhere to live considerations.

No

A hedge is all about reducing a specific risk.

If your position leaves you over-exposed to losses if inflation takes off (e.g. because you are holding 100% cash) then you may want to reduce that exposure by taking on some debt. So, depending on your circumstances, buying something on high leverage might be a good option, provided you don't overstretch yourself. However, as other posters have mentioned, now might not be the best time to take on debt against a new house, and there are other hedges against inflation.

Edited by LiveAndLetBuy

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Further proof, if any were needed, that buying property turns your brain into a mushy pulp.

I think so. Even if house prices went up in line with inflation and there was never any 'profit' to be made, buying your own place must be a great feeling.

------------------------------------------------------------------------------

I'd be quite happy buying now, if I could get those great low rates for the life of the mortgage.

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I think so. Even if house prices went up in line with inflation and there was never any 'profit' to be made, buying your own place must be a great feeling.

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I'd be quite happy buying now, if I could get those great low rates for the life of the mortgage.

There's the rub!

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