Saturday, 4 October 2008

Buying is Dead Money

It has been widely assumed for years now that renting a property is a waste of money, or what has become known as dead money. For years now I have rented, moving from property to property, one end of the country to another, and I have never understood the saying of 'dead money'. How can paying for a living space be dead money? I mean, I pay rent to the owner of the property, who then provides me with a house to live in. He maintains all the upkeep, insurance, wear and tear and I get to live in a fully furnished property. Now that property prices are completely collapsing, along with the overinflated UK economy, I can view the events occurring with no worry or stress, in fact with enjoyment as I watch an interesting chapter in human history unfold. I have no huge debt. If I need to move for another job I can relocate within a month or two. If I wish to move into a larger place I can do so. Renting, during a downturn like the one we are about to go through is anything but dead money. It's money well spent and let me break down some of the 'home ownership' myths that have been falsely put forward in the age of stupidity.

  • The first one, and I always enjoy hearing this, which reveals the majority of peoples financial illiteracy, is rental payments are dead money as opposed to paying a mortgage. For the type of properties I rent in order to buy them in the past couple of years the interest payments on the mortgage would have been larger than the rent I paid. Now if I actually wanted some sort of payment plan, then it would have obviously cost a lot more, in fact all my wages pretty much. Then of course if I miss payments on a mortgage persistently I risk having the property repossessed and of course obtaining a terrible credit rating, with the bank chasing me for years to come. If I miss a rental payment persistently, the landlord will eventually be able to evict me, but I have no bad credit rating, no legal proceedings. I just have a bad reference, in which case you just don't use for your next property as most landlords are desperate for tenants.

  • Rents will rise and mortgage costs will drop. This is the complete opposite of what will happen over the next few years. As credit becomes tighter and banks try to repair their balance sheets they will seek to deter borrowing and encourage saving. Therefore mortgages will be more more expensive. If I did buy in the last couple of years I would have needed to get a huge adjustable mortgage which would have been in negative equity by the time re-mortgaging came around therefore I would be paying the much higher adjusted rate. I feel sorry for a lot of people in this position who will have to pay a lot more in the years to come, especially when they see rents falling. Despite what the 'experts' say (the same people that were telling you the sound fundamentals of the economy, when I was telling you they were lying), rents will come down, in fact they already are. People are emigrating, moving back in with relatives as jobs are lost and so on, meaning less demand for rentals. This is how it always works in economic downturns.

  • I have no upkeep costs of the properties I live in. If the boiler breaks down, I don't pay a penny, and its the landlord who is responsible. Washing machine breaks? No worries, my landlords wallet can pick that one up. Fancy a change of decor? Rather than buy a load of tat with the stress of getting it and building it, I can go find a house that is furnished to more of my tastes (if I was interested in that kind of thing).

  • In the event I loose my job, I simply give my landlord two months notice and leave. Go back with the parents what ever I want. I can walk away, intact and with money still in the bank.

  • The savings I have acquired so far I can put into savings accounts that will earn interest. If this money was put into a deposit a couple of years ago, it would have long been eaten away by the price drops of the past year.
Point is, I'm comfortable and happy renting, and for some reason for the past decade, in particular in the UK and the US if you rent you are almost seen as a second class citizen. The sad thing is, people are still trying to buy property now, thinking because it has dropped 10-20% it is somehow a bargain. People are still viewing property through the tinted glasses of a way to get rich. In reality the equity they will have will be shortly wiped out in the next few years and will not be recovered for decades. The collapse of Bradford and Bingley should completely topple BTL owners and it will bring about even more drops to come, along with the rising unemployment and government budget deficits. Despite the deteriorating state of the economy people are still talking about a bottom on property. A bottom will appear when everyone stops talking about a bottom. It will happen when people have become weary of debt, governments and banks. It will happen when mortgages are far cheaper than rents, and sizable deposits are required, with banks lending to prudent standards once more. It will happen when people have lost their 'pensions' in BTL and say there is no money in property and only a fool would buy now. It will happen when people say, buying is dead money.

Turning to the Bailout

The situation is quite clearly going from bad to worse. I said that the governments and institutions of the world would try and prop the economy up, and this would only make things worse. It's no suprise that the $700 Billion Bailout package has passed on the second attempt. Since the post war period, Western economists and leaders have become drilled in Keynesian economics, a tragic and false theory whereby governments should become active in fiscal stimulus activities during recessionary periods, with the discouragement of saving and encouragment of consumption. I mean it defies logic when you think about it, and its what is occurring at this very moment. We've just had the biggest consumer boom and spending spree, well ever. According to John Maynard Keynes whose theories our leaders are trying to follow, we should be increasing spending and government intervention, trying to prop up the very excesses that were caused during the boom. House prices are too expensive, therefore we throw money at the problem, which is a waste of resources and goes against the very market forces that demand the correction. What the market at the moment is saying, is that we have too much debt in society too little savings and are not producing any real value in the economy due to all the mal investment that has occurred. Therefore prices in certain areas need to fall and fall fast in order to bring about a normalisation to the economy. All good economists recognise the recession is the good part of the business cycle, and at the end of one the economy is returned to a state of optimal efficiency. The media and mainstream 'experts' however, have made economic contractions into something that should be avoided at all costs, even if it induces a worse recession in the end. Its all scaremongering, just like terrorism, rather than looking at causes and reasoning as to why the terrorism was created in the first place. It's how institutions always control people. Religion, for example Christianity, does this by giving the concept of 'hell', a place where people go if they don't conform with convention and ask questions.

This bailout package won't be the last. It's just the foot in the door. There will be more, with politicians proclaiming it needs to be carried out in order to save the system from collapse, when in reality the problems are compounding further, with the endgame of a worse collapse. Government deficits are increasing along with debts, while savings are being depleted further, thus the fundamentals are continually getting worse. I was hopeful we may let the bust proceed but as ever the powers that be have decided to prolong the bust and ensure that we experience the worst recession any of us have ever seen. We are entering a period of great change, as we pass the opening chapter of many chapters to come.

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