With the BoE expecting inflation to reach >7% what are the best options when you may need the cash in the short term (1.5-3 years)?

[amazingayla]

Hey everyone,

Lady Gibbons and I are looking to buy our first house soon. We've already got our deposit ready but we've decided to hold off for 1.5-3 years for the housing market to calm down a bit (more the having to overbid to get a look in side of things rather than concerns about crashes etc) and for our working arrangements (read: wfh) to have more clarity.

As it stands, we have our deposit in premium bonds as we felt we we're close enough to buying that we didn't want to risk it to the markets etc. But obviously that only gives us 1% and right now, with inflation expected to top 7% we could be looking at a significant real-terms fall in the value of our deposit if this high-inflation environment persists.

For people in our position, what's the 'best' strategy for hedging against inflation at the moment? Are there any bond options that may be more appealing than premium bonds where I can just lock it up for a couple of years? Or is it really a case of swallowing the inflation if you have little risk appetite?

And just for completeness - basically all our money is currently in premium bonds & cash LISA's, with a small amount in crypto, a S&S ISA, and cash for six months expenses.

Thanks!

[EDIT] Thanks everyone for the feedback. Just wanted to flag that I feel like my comment on waiting for the market 'calm' has mislead people. Even if the market wasn't mad, the other reasons mean we wouldn't be in ready to buy for the next 1.5-3 years anyway.

 

[cleanup77]

@amazingayla You need to reconcile your forecast for the housing market with what "inflation" means.

The BoE forecast is for the path of the CPI (an index of consumer goods and services). You are not buying the CPI basket with your deposit savings, you are buying a house. Presumably a house of a specific type in a very specific area.

You start your post saying you are holding off waiting for the housing market to cool. Fair enough, but what does that mean? I guess you have an implicit forecast of house prices there, maybe that they will fall, or maybe that prices will stop rising so fast?

So what you are asking boils down to "I've decided to wait for house prices to fall before buying a house, what do I do about [house] prices soaring in the mean time?" which doesn't make a lot of sense.

 

[amazingayla]

@cleanup77 Your overall point is accurate but I wouldn't say I'm waiting for the market to 'cool'. That is, I don't mind if the house ends up more expensive than now, I just want to avoid the stress of bidding wars and houses being routinely sold on the day of listing!

There are also personal factors playing into the decision to hold off as WFH arrangements evolve post-pandemic (i.e., we may be able to move up to a cheaper location in 2 years compared to today).

But as i said, your overall point is fair, inflation doesn't matter as much as house price inflation as far as a house deposit goes!

!thanks

 

[sue94]

@amazingayla With the low and still very flat supply of homes with no dip in demand I genuinely don't think you will get away from that unless you move somewhere with less market pressure generally.

You could hedge with a partial buy into indexes/stocks linked closely with property values. It would have some risk but your assets would be riding the same wave.

 

[cleanup77]

@amazingayla Makes sense & good luck!

 

[heyilovegod2254]

@amazingayla

I wouldn't say I'm waiting for the market to 'cool'

You might not say it

I just want to avoid the stress of bidding wars and houses being routinely sold on the day of listing!

But you just described it

The market might cool a little from a rather crazy 2021, but fundamentally we simply aren't building enough houses for the number of people who want a house, so there is always going to be demand. And in any case, most of that cooling off you want has already happened - prices are stabilising, bidding wars aren't so much of a thing (August was nuts, it's not like that now), some houses actually stay on the market for a few weeks etc.

I'd also suggest that, if you're looking at buying over the next few months, the market is probably going to cool down about as far as it might for a while... people right now are bricking themselves over inflation and the cost of living - people are still selling now because they've been planning to for months and don't want to abort at the last minute, but listings always lag a little behind reality because people don't tend to make a snap decision to buy or sell a house. In 2-3 months, I think we'll likely see the impact of people's current wariness... suddenly those extra savings they've built up during the pandemic aren't looking as comfy

 

[ctguy]

@amazingayla On one hand you have general inflation and on the other hand you have house price inflation. Seems counter intuitive to wait for the house market to stabilise, but supposedly continue to grow, and in the mean time try to insulate the value of your cash.

Why not bite the bullet and buy now? Even if you bid a bit more than the price today, you will probably end up paying even more tomorrow, if house prices continue to grow. Just a thought.

 

[amazingayla]

@ctguy

Why not bite the bullet and buy now? Even if you bid a bit more than the price today, you will probably end up paying more tomorrow, if house prices continue to grow. Just a thought.

It is a reasonable position. We we're on the precipice of exchanging a few months ago using that rationale but we decided to pull out on the basis that we: a) would lose our FTB benefits; b) may be able to move to a better (and cheaper) location for us in the next 2-3 years; c) would have to pay stamp duty again if we did move.

!thanks

 

[berlin_worship]

@amazingayla Just a point on the above but 2-3 years of equity over paying rent could more than offset your concerns here.

 

[john53]

@berlin_worship Equity and potential growth in house value

 

[nonamer21]

@amazingayla There’s no hedging against something that’s already happened. Sadly. Or else everyone would do it and the problems caused by inflation wouldn’t exist. The time for hedging was 1-2 years ago.

Where the markets are now, if I was you, I’d stay in cash and watch the markets. As rates rise we may suffer a growth scare in the coming months presenting you with an opportunity to invest a portion of your capital at far better valuations. This I see as your only chance, if it happens. Something like -15% from yesterday’s close risk 50% of your capital.

 

[amazingayla]

@nonamer21

There’s no hedging against something that’s already happened.

Indeed... I thought I'd edited that choice of word out but clearly it slipped through.

Where the markets are now, if I was you, I’d stay in cash and watch the markets. As rates rise we may suffer a growth scare in the coming months presenting you with an opportunity to invest a portion of your capital at far better valuations. This I see as your only chance, if it happens. Something like -15% from yesterday’s close risk 50% of your capital.

!thanks for the input

 

[resjudicata]

@amazingayla Just buy the house now? Literally that's how you beat inflation. Get a long term fixed rate and enjoy your "free" house as you repay interest that is under inflation.

You can't simultaneously wait for the market to cool and look for an inflation hedge to buy later. Those two positions are antithetical.

 

[amazingayla]

@resjudicata

Just buy the house now? Literally that's how you beat inflation. Get a long term fixed rate and enjoy your "free" house as you repay interest that is under inflation.

Unfortunately, the timing just isn't right for us at the moment. !thanks though

 

[resjudicata]

@amazingayla Good luck with your deposit then! I wouldn't cash out or cash in anything (except more premium bonds) and just wait. One can't time the market now or later.

 

[amazingayla]

@resjudicata It does feel like that's my only choice. But damn, 1% interest in a 7% inflation environment :x

 

[yahleel]

@amazingayla That’s probably why he’s suggesting buying, like he said the high inflation will pay down your debt in real terms. If you’re looking for some quick wins, have you looked at LISA? You’ll get a straight 25% from the gov on your contributions (deposit the max of 4k gives you 1k extra). You have to have it open at least a year, but it could help buffer up the deposit if you’re not looking to buy yet, if you’re quick and deposit 4k now and 4k in April, you’ll get 2k, and if your wife does the same that’s an extra 4k. Free easy money.

Might be worth mentioning this is irrelevant if you’re looking at a 450k+ house.

EDIT: never mind, I apologise, I missed the hit where you mentioned the LISA in your post

BEST OF LUCK

 

[itspt95]

@amazingayla Personally, I would say if you're in a position to buy now, buy now. I don't think any of the fundamental issues with the housing market are going away any time soon, and if the market "cools" in coming years it will be because asking prices have risen to better reflect final sales prices. In addition to house price increases, you're also currently spending money on rent. And then there's the non-financial side of homeownership - i.e. if you're anything like me, not having to deal with landlords or letting agents is pretty high on the list of reasons to want to buy!

But to answer your actual question, I'm afraid there is no good risk-free option. Obviously in normal times interest rates would be a bit closer to the rate of inflation (and we still might see slight increases in interest rates, and a slight decrease in inflation) but cash savings always loses out to inflation to some extent. You can get fixed savers that pay more than premium bonds (based on average luck) but the rates are still pretty dire.

 

[presh201]

@amazingayla I'm in a similar position, got it in a next-day savings pot with Monzo. Very low interest rate but with a large sum of money it's worth setting up.

The problem is that a) you can't really afford to lose any of it, which means low risk and b) it's a short timeframe.

That really just limits you to savings accounts or premium bonds.

Depending on your attitude to risk, you could consider a multi-asset fund in a stocks & shares account. They generally exceed inflation and are somwhat cusioned to market dips. With your timeframe you're not guaranteed to recover your losses if we were to have another black swan / market crash, but you'd have to be fairly unlucky to come off worse after 1.5-3 years.

If I were you I'd do that, but then I'm quite comfortable with higher risks.

 

[amazingayla]

@presh201

Depending on your attitude to risk, you could consider a multi-asset fund in a stocks & shares account. They generally exceed inflation and are somwhat cusioned to market dips. With your timeframe you're not guaranteed to recover your losses if we were to have another black swan / market crash, but you'd have to be fairly unlucky to come off worse after 1.5-3 years.

Interesting perspective. I'm a pretty risk averse person but this is something I should consider more closely even if I do decide it's not for me.

!thanks