Why buy in London now? The prisoner’s dilemma

by flathuntlondon

I spoke to a mortgage broker last week. He said “Buying in London right now is terrible. But you have to do it”. As we see in articles all the time currently, London is really expensive, competitive and hard to buy in. So why would anyone want to buy in London currently?

The short answer is that it’s going to get worse. Despite occasional dips, the trend for house prices in London is continually going up, due to the high level of demand and stagnant growth.

Property Prices in London

graph from 247bull.com

Demand will continue to rise, due to London’s prominence for UK and international businesses, and house builders will continue to not build – having learned that it’s more effective to sit on land and build slowly to maintain prices. While we continue to have a government who are promoting the interests of large businesses and the well-off, we will not see any large government led house building scheme. Instead they have shown (through the Help to Buy scheme) that they are more interested in preserving house prices than creating places for people to live.

In the current climate, it’d be impossible for us to save more. House prices in Lewisham rose 14% last year, meaning a property that was £250,000 last year costs £285,000 this year. We’re not in a position to save £35,000 in a year, and so waiting is not an option – the properties we could afford next year would be worse than the ones we can afford today.

The government have shown that they’re not going to let a crash happen. Just yesterday, they announced that interest rates would be kept at this historical low figure for the next year, and their initiatives throughout the last few years (such as the Help to Buy scheme, which helps no-one but current house owners) have shown that they are not going to let the housing market fail.

So with rising prices, it seems like there’s no hope for first time buyers. And now we come to the prisoner’s dilemma. Each first time buyer has two options – jump on the property bandwagon, or reject the housing market. If everyone rejected the housing market, it would crash, bringing prices to a reasonable level. This is the best possible solution for them.

If everyone buys at the current prices, the system is sustained – a slightly worse outcome for everyone. Prices will rise, but at least everyone will have some capital and will be brought along for the ride.

However if some buy, and some don’t, this is the worst possible outcome for those who don’t. The market will continue to rise, and those who didn’t buy will be left behind – and find the property market forever out of their reach.

Faced with this decision, you’d have to be very brave to reject the opportunity to purchase now. I’m not sure if I am.