Buying A Home, A Sound Investment?

With house prices in decline now for a third consecutive month (as at 1st February 2008) and with some economists predicting further decline in the coming months one must ask the question whether home ownership is likely to be a good investment.

Although slowing growth often goes hand in hand with lower inflation, it seems that the latest surveys on consumer confidence indicate that inflation may be set to increase over the coming months. This makes the Monetary Policy Committee’s job of adjusting interest rates to balance the economy more tricky and many economists now seem uncertain as to whether rates are likely to fall as dramatically as previously predicted.

Lower interest rates which naturally ease borrowing criteria are an obvious benefit to all but none more so than the First Time Buyer. A very large percentage of house chains are closed thanks to the First Time Buyer and the market would suffer greatly should higher interest rates, tough borrowing criteria and uncertain house-price conditions prevail.

Despite this slightly gloomy outlook I have to say that I still feel home ownership is the way to go for the vast majority of people. Firstly, everybody needs a place to live and the only alternative to buying your home is to rent.

Although popular in some countries, I have personally never liked the idea of renting as a long-term proposition. When choosing a home to buy the location is as, if not more important than the property itself and the uncertainty with renting could mean that an ideally positioned home now is not available in 6 months time if the landlord chooses not to renew your agreement.

Secondly, the majority of UK citizens are falling short of making anything like adequate provision for their retirement. Even the small number of people paying their maximum contributions are likely to see dramatic reductions in income post retirement and who would want to continue to pay rent during these years when a mortgage could have been paid off already? Not I!

I often wonder whether pro-renting countries would have the same outlook if they were subjected to the appalling traffic conditions, ever-tightening school catchment areas and poor pension projections that we currently ‘enjoy’ in the UK.

Looking at the demographics, the number of people wanting to buy new homes is still exceeding the number of homes being built and this trend is likely to continue whilst land available for building remains in short supply. The laws of supply and demand should generally therefore ensure that prices remain buoyant in the medium to long term.

There are also ways of safeguarding yourself against the financial consequences of fluctuating market forces. Certainly a fixed rate mortgage can guarantee your payments for a chosen period of time and insurance can offer protection against the financial consequences of poor health or unemployment.

We all know that journalists create headlines which sell papers but its worth remembering that despite January being the 3rd month of consecutive decline is was only actually 0.1% (according to Nationwide Building Society) which is frankly a number almost too small to be hugely reliable and as a National statistic tells us nothing about individual areas. Lets also keep in mind that the annual rate of property-price growth is still 4.2% a figure which is well above the average price of inflation.