Cognitive dissonance in housing markets?

Although Merryn Somerset Webb (a Personal Finance columnist in the FT) outlines a very bearish case on London house prices, she’s buying a studio flat there.  She’s pretty sure that it will be a bad investment but she feels the need to buy one due to her current blend of work and home life.  I’ve often seen this phenomenon.  People that I know have bought houses when they need to although sometimes when they think that it doesn’t make any financial sense (and then have proven to be wrong when it turned out to have made financial sense!).  Fund managers can find themselves in similar situations when they are allocated funds to spend although they think that the market is overpriced.  Merryn’s rationale for her decision is that

It’s a utility purchase I intend to depreciate over 20 years, not an investment… The great unwinding of the global credit bubble can take London houses down with it just as easily as it can take steel mills.

While she’s not certain and expresses these reservations, she sees five drivers of falling prices:

  • forthcoming supply spike;
  • government policy hostility towards high London house prices manifested in…;
  • tax increases (particularly changes to Stamp Duty and tax relief on buy-to-let investments);
  • an expected decrease in foreign investment especially from Chinese and Russian investors; and
  • expected increases in interest rates.

I’m sure that she’s done the calculations but it might have made more sense to lease rather than buy given her apparent expectations.

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