A Safe Haven For Cash

[profitofdoom]

I don't share the view on a crash scenario.I think they will do everything in their power to avoid that and in reality with 5% inflation modest falls over the medium term are correcting the bubble.In my view we will be 10% down from here in 2013 and inflation will have made that 20% in real terms.My OP really referred to being safely liquid in the interim period.For example how safe are the government guarantees in the event of a Greek default? And what if that takes down the rest of the PIGS?

[Tired of Waiting]

I don't share the view on a crash scenario.I think they will do everything in their power to avoid that and in reality with 5% inflation modest falls over the medium term are correcting the bubble.In my view we will be 10% down from here in 2013 and inflation will have made that 20% in real terms.My OP really referred to being safely liquid in the interim period.For example how safe are the government guarantees in the event of a Greek default? And what if that takes down the rest of the PIGS?

Yep, that is their goal. Difficult, but possible. They have the banks, and the printers. If the Unions don't turn the table, if wages remain stable ( = IR can stay low), the gov. may even achieve it.

[Take Me Back To London!]

Used cars.

Ex-Wehrmahct

[Lepista]

We can make a crude discounted utility equation then. If the cash/property exchange rate is appreciating 2.2% p.a while inflation is outstripping interest rates then he's barely breaking even (and that's assuming he's not spending the interest). Sorry, but I don't see how you're gaining from this unless you're making better than inflation returns on your money or property is in free-fall (which it's not).

How would your numbers stack up if that money was tied up in property, kenzdawg? Looks like you are comparing Bruces situation with something else. It's simple - what is Bruces bank balance doing if he buys, and what is it doing if he rents? What house will he have if he buys now, and what house will he have if he waits until after prices crash? seems pretty simple to me, and if I had the money to be in Bruces situation - I would do the same as him.

[Democorruptcy]

House £350K, rent £11k, interest £13,650.

Short enough?

NS&I Bonds paying 3.9% are not tax free.

£13,650 after 20% tax is £10,920

[Bruce Banner]

NS&I Bonds paying 3.9% are not tax free.

£13,650 after 20% tax is £10,920

Being retired, with two tax allowances, the first £4,880 of our savings income being taxed at 10%, and not yet receiving state pensions, it's more like 5%, so about £13K net .

[kenzdawg]

How would your numbers stack up if that money was tied up in property, kenzdawg? Looks like you are comparing Bruces situation with something else. It's simple - what is Bruces bank balance doing if he buys, and what is it doing if he rents? What house will he have if he buys now, and what house will he have if he waits until after prices crash? seems pretty simple to me, and if I had the money to be in Bruces situation - I would do the same as him.

It depends entirely on your perception of the utility of home ownership vs the disutility of renting. But at the current rates of 2.2% property depreciation, circa 4-5% inflation and >3% interest rates it really doesn't look to me like you'd be any worse off buying now rather than later unless you expect one of those factors to change dramatically. That is the bet people like Bruce are taking. There is a cost to everything and that includes the cost of anticipating a future gain, you can't say it's worth until you've worked that cost out.

[Lepista]

It depends entirely on your perception of the utility of home ownership vs the disutility of renting. But at the current rates of 2.2% property depreciation, circa 4-5% inflation and >3% interest rates it really doesn't look to me like you'd be any worse off buying now rather than later unless you expect one of those factors to change dramatically. That is the bet people like Bruce are taking. There is a cost to everything and that includes the cost of anticipating a future gain, you can't say it's worth until you've worked that cost out.

Don't forget to factor in the cost of home ownership compared to renting (e.g. maintenance costs);

If he's not losing money from keeping out of housing, then it's easy to step back in at any point. If it's the other way around, then his options are much trickier to implement.

Of course, if you have to leverage to buy a house (e.g. with a mortgage), the numbers rapidly stack against buying right now.

[Bruce Banner]

It depends entirely on your perception of the utility of home ownership vs the disutility of renting. But at the current rates of 2.2% property depreciation, circa 4-5% inflation and >3% interest rates it really doesn't look to me like you'd be any worse off buying now rather than later unless you expect one of those factors to change dramatically. That is the bet people like Bruce are taking. There is a cost to everything and that includes the cost of anticipating a future gain, you can't say it's worth until you've worked that cost out.

Actually, I'm not anticipating a future gain, I'm not buying because I want to avoid a future loss. Also, I hate decorating, gardening and all those other chores that home owners have to endure, not to mention maintenance and repairs .

[R K]

Actually, I'm not anticipating a future gain, I'm not buying because I want to avoid a future loss. Also, I hate decorating, gardening and all those other chores that home owners have to endure, not to mention maintenance and repairs .

A very good point. Moreover 'cash' is intuitively underestimated as both a hedge against future price falls/risk and as an inflation hedge over time compared to say bonds or equities. He does mention the unusual negative real rates currently but they tend not to persist for long and you appear to have secured pretty good cash rates, which is to your advantage.

A rather good paper on this topic you may like from GMO - it looks specifically at equities and the use of cash as a hedge (equally applies to houses though) but also the importance of the options cash gives you to deploy your capital when there is better value and lower risk. Which is one of the points you're making.

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIA6KcUdqlSIwEgyohGQxhh7bRXD4xyxMHJ0yKJp8UmLQbB%2b96yuKzHmQPVU8fCau6aDZCTV5JgnttLdI9Ykx5M4tg8YZOVTH3o%3d