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Weekend reading: How high property prices are making many of us relatively poorer

Weekend reading: How high property prices are making many of us relatively poorer post image

Good reads from around the Web.

I think we’re nearly all agreed now that UK property prices are too high, and in the South East at historically stretched levels compared to rents or incomes.

(Okay, so my mum is a holdout. She rightly views my housing sob story as leavened by a substantial dollop of my own personal failings… I think she also wants to see a granny annex in her future!)

You do still hear from the odd Barry Blimp who says that it was just as difficult to buy in his day, when he bought a three-bedroom house in Zone 2 in London aged 25-years old on his graduate salary – and that he managed it because he didn’t own an iPhone.

But even most naysayers have shifted to tell you that fine, yes, house prices are absurd, but what’s so bad about renting anyway?

This view is invariably advanced by people who haven’t rented for decades, and often as not who’s only recent contact with a tenancy contract is the one they just got signed for their latest buy-to-let.

Down and out in London and Bristol and Oxford and…

Meanwhile people who feel locked out of the property market know that it’s not just a matter of being allowed to bang nails into the walls to put up their own IKEA pics.

They can see how not owning housing – geared up via a mortgage to lottery-level winnings for older generations – has left them floundering in the wake.

I see this illustrated all the time with my 40-something London friends.

The majority who bought in their 20s never stop taking holidays, eating out, and buying fancy bits and bobs.

The few who didn’t even avoid having too many Sunday lunches in the local gastropub – or go the other way, throw in the towel, and spend their large yet useless deposits on year-long hedonistic benders. (i.e. A bit of travel).

As for my 20-something friends, they live from paycheck to paycheck and imagine owning a one-bed flat with the same sense of wonder with which the Baby Boomers viewed the moon landings.

Before anyone gets out their tiny violins, I’m not talking about me. My lifetime savings rate has been very high, and my investment returns above average. As a result I’ve amassed a chunky warchest. I could buy, but I don’t.

However I don’t think it’s reasonable to expect an entire generation of bright young people to turn themselves into a Scroogier version of Warren Buffet just to do what their parents did as a matter of course.

Fine, perhaps this is the way the market will be for the foreseeable future. But if we’re being pragmatic then we should at least acknowledge the strain it is putting on social norms.

The return of feudalism

In particular young people – who also face student debts, high rents, low wages, unfunded pensions, and no chance of a BTL windfall – will get relatively poorer even if they do the right thing, unless some sort of action is taken.

Business Insider recapped a Resolution Foundation paper this week that shows how property ownership in the UK is driving inequality.

It notes that:

Britain has changed since 1998.

Back then, it only took workers about three years to save enough money for a down-payment on a house.

Now it takes 20 years, on average.

(Sure Barry, it was just as hard in your day. The kids should shut up and stop drinking cappuccinos, right?)

This graph shows how property ownership is now the major driver of inequality:

Note the divergence on the right hand side (Click to enlarge)

Source: BI/Resolution Foundation

The key is to look at how the lines used to be close together, and now aren’t. It was not ever-thus, in short. Not owning a home didn’t put you on a downward escalator for life.

Raising the White Paper flag

Like most, I don’t see much in the Housing White Paper that looks likely to address the under-supply of new homes in the UK.

Perhaps recent political events might if they curb migration and hence population growth – but then lower immigration could also reduce supply by depleting the workforce. (House builders are already complaining about a skills gap).

Maybe it’s time to think differently. If we can’t build enough extra houses, then perhaps those without houses could get a different kind of tax break, for instance.

It irks me enormously that friends see 10-20% capital gains tax-free growth each and every year on their homes while I face a huge bill if I sell various un-sheltered legacy holdings.

Shouldn’t investments be fungible, especially nowadays when it is so much harder to buy property? Maybe if you don’t own your home you should get a six-figure CGT allowance?

Okay, that’s an aspiring 1%-ers problem. The vast majority of millennials will struggle to even make a dent into the new £20,000 annual ISA allowance that’s coming in April.

Maybe renters could deduct their rent from their income tax bill? It sounds insane, but then crazy ailments may require outlandish treatments.

What the government should not do is row back on the tax changes hitting BTL. If anything it should speed them up. There’s no justification for a policy that actively encourages a minority to get richer, as per the inequality graphs above, while other citizens are locked out.

Oh, and before someone says it, I don’t think inheriting property wealth is the ideal solution. That just compounds the new feudalism of a property owning class and a rootless peasantry that we seem to be sleepwalking into.

Unless like me you want to start taxing inheritances at 90% or similar. And I know very few of you want to do that. 🙂

Here’s a few more property stories from this week:

  • Property owners get richer while everyone else gets poorer – Business Insider
  • How to own a home by the age of 25 – BBC
  • The 30-somethings fleeing London’s property prices – The Guardian
  • Can the Government’s Housing White Paper fix the “broken” market? – Telegraph
  • Buy-to-let landlords face remortgage crunch [Search result]FT
  • You could buy builders for their high dividends instead of BTL – ThisIsMoney

Have a great weekend!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Reports of the demise of the sub-1% mortgage rate were exaggerated, The Telegraph reports. Santander is out with a new 0.99% fixed rate mortgage. It’s good for 18 months, but you’ll need a 40% deposit to get it. You can also still get 0.98% from the Yorkshire Building Society. That’s a tracker though, not a fixed rate product, so you’ll be at the mercy of – ahem – soaring interest rates.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Why the Bogle model beats the Yale model – MarketWatch
  • How to make money in the ETF business – ETF.com
  • Passivity is the new activity – Dealbreaker
  • Larry Swedroe: How survivorship bias happens – ETF.com

Active investing

  • Why shorting is so hard – Morningstar
  • The case for emerging markets [Podcast]ThisIsMoney
  • Hedge funds face a Doomsday scenario – Value Walk
  • The market tends to sniff out profit warnings in advance – Bloomberg
  • Summary of Seth Klarman’s latest much-discussed letter – Dealbreaker

A word from a broker

Other stuff worth reading

  • The elderly, cognitive decline, and banking [Search result]The Economist
  • 15 ways to reduce your tax bill [Search result]FT
  • Yes, *in general*, Remain voters really are much better educated – BBC
  • Premium bond prize cuts are coming in May 2017 – The Telegraph
  • Merryn: Buying a new car drove me around the bend [Search result]FT
  • Passion investing and your portfolio – The New York Times
  • The importance of bubbles that did not burst [Search result]FT
  • The rising significance of inheritances – Accountancy Age

Book of the week: I missed The World According to Star Wars when it was published last year. But I heard an interview with the author Cass Sunstein this week, which piqued my interest. His book recaps the movies’ success, before exploring how we can apply its lessons to everything from law to parenting. Sunstein is a Harvard professor who wrote the influential Nudge, and his new book also has a serious intent. Another one for the pile.

Like these links? Subscribe to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 74 comments… add one }
  • 1 ermine February 11, 2017, 1:06 pm

    I am of Barry Blimp’s generation. I was dumb enough to buy in 1989, what is surprising from your chart is that it seems to show I experienced pretty much the same as someone who started in recent years, the fanout seems to have been ‘twixt 1981 and 1990. The coincidence with Thatcher selling off council houses is quite striking, particularly since it is housing that seems to be at issue with the rise in inequality.

    Something is wrong with this. I think decent graduate jobs are much better now than they were for me. The very clear much faster career progression on this Resolution Foundation report show that current generations see much more rapid and higher in inflation-adjusted terms career progression. They get ahead faster in their lives than I did.

    But the countervailing problem is there has been a terrible concentration of decent jobs into London and away from the rest of the country, and presumably to get that career progression you need to go to the Great Wen. Or some equivalent concentration – Oxford, Cambridge, Bristol. I grew up in London and spent most of my 20s there, but eventually realised I couldn’t ever buy a house on an engineering salary. But I was able to move to a decent job out of London to a provincial town.

    It is London house prices that are an issue, yes, they are probably too dear elsewhere in the country but get out of the London attractor and house prices are a lot cheaper. But there’s relatively less well-paying work spread across the country than there used to be, so that isn’t terribly useful for people who aim high. It’s odd that hugely improved communications resulted in a shocking increase in geographical concentration of high paying work, and I am sure globalisation has it’s bit to do, but that seems to be what happened.

    What I’m getting is is it isn’t just house prices. It is the changes in the workplace too which aggravate the problems massively. House prices would be less of a problem if mid and high-flying work were spread more evenly across the country as it used to be.

  • 2 martyn February 11, 2017, 1:17 pm

    Aren’t we supposed to have falling house prices right now?

    I don’t for on minute expect this happen, wiser heads will prevail across the channel one hopes.

    However official figures suggest 1.2 million UK expats and conservativly 3.2 million EU citizens. The straight swap that the EU implied when they refused to discuss reciprocity with May at the last summit, would seem to indicate lots of free housing, would it not? (Given most are in London the place might well start to look something like a ghost town)

    Maybe houses prices will yet fall to a sensible level.

  • 3 Retirement Investing Today February 11, 2017, 1:27 pm

    “Maybe it’s time to think differently. If we can’t build enough extra houses…” I’m yet to see any data that has convinced me it’s a shortage of housing that is causing silly house prices. My view is that house prices are driven by affordability which is largely influenced by the price of debt. Put mortgage rates to 5% (along with continuing/accelerating the removal of the BTL bungs that you mentioned – I can’t claim a tax deduction against borrowings to buy equities so why should a BTL’er) and let’s see what happens to house prices.

  • 4 Neverland February 11, 2017, 1:31 pm

    “That just compounds the new feudalism of a property owning class and a rootless peasantry that we seem to be sleepwalking into”

    This is what England has always been there is no “new” feudalism. In 1918 only 23% of families owned their own homes, we only crossed 50% in 1971. Real figures were probably lower due to multiple generations living in the same house


  • 5 The Investor February 11, 2017, 1:35 pm

    This is what England has always been there is no “new” feudalism.

    Neverland, your own illustration shows it wasn’t “always” like this, while use of the word feudalism shows we understand we have been here before.

  • 6 The Investor February 11, 2017, 1:38 pm

    I just want to clarify, Barry Blimp is invariably older (50s+) and almost always a man, but not all old men are Barry Blimps. There are plenty of non-Blimpy older men around and I have no problem with the demographic as a point of principle!

    They are over-represented in investing though. Perhaps not around here after the — um — sturm and drang of recent months, but you’ll see them running amok on the likes of ADVFN and The Telegraph.

    I could easily become a Barry Blimp if I’m not careful. I’m vigilant!

  • 7 FI Warrior February 11, 2017, 1:40 pm

    I agree 100% with your whole article, but can’t see a way to stop the country continuing to sleepwalk into an autocracy via contemporary feudalism, with an iphone. If they don’t have a vested interest in the status quo, then people have the attention span of a fruitfly ( https://markmanson.net/attention ) or simply don’t want to think of anything uncomfortable, like how their future is being sold off for the equivalent of trade beads by our elite predator-parasite class, the 0.0001% who own almost everything necessary.

    The housing crisis will never be solved, just as all moves in the last quarter century have been merely tinkering with window dressing to fool enough of the electorate to keep the scam running. The house-price bubble that is kept afloat no matter what, is designed to keep the electorate pliant and the establishment’s wealth, privilege and advantages intact. As long as people remain ignorant enough to be divided and ruled by whatever means, from simple nimby-ness to outright xenophobia, then the gravy train will steam onwards.

    The few in the intelligensia who can see are impotent, being too few to make a difference, to easy to label crackpot. The 50% of the population who’re just surviving are too tired from working all hours on 0-hour contracts to fight back and those doing better but by no means rich, also keep quiet because they don’t want to lose their current competitive advantage vs the poor. This lack of unity by all being shafted is the lubrication that greases the wheels of the injustice machine, its lifeblood; and there is no saviour in sight.

    The young who are getting the worst deal whether they know it or not, have little experience of life by definition, as such, even if they have enough energy to fight for their rights when not on the minimum wage hamsterwheel, haven’t known anything different, so don’t realise their futures have been stolen. If they look to role-models for help, their parents or grandparents generations, they get confusion, ignorance and indifference, maybe even are told it’s their fault for being very special snowflakes. Instead, the ugly truth is that we are always to an extent a prisoner of our time, whatever your career path in the eras of the world wars, you were going nowhere fast if you had the misfortune to be born then. Similarly, what we have now is that the current population of the planet is eventually being forced to live out the reality of long-term, out-of-control population growth coinciding with unsustainable use of the available resources; the pie is even shrinking. Like gravity, this is one fact that can’t be avoided, so however it’s marketed, its reality will not cease to exist and all the denial in the world will still not change that; so it’s wake-up, smell the coffee time for ostriches.

  • 8 John Kingham February 11, 2017, 1:49 pm

    “As for my 20-something friends, they live from paycheck to paycheck and imagine owning a one-bed flat with the same sense of wonder with which the Baby Boomers viewed the moon landings.” – This line was funny I almost spat my coffee out onto the computer.

    Totally agree with everything you said. Following up on what Ermine and RIT said:

    Ermine seems to be saying that if you have a good degree and a high IQ then the problem is a lack of high-paying jobs away from London, i.e. where houses are cheaper. Two counter points: 1) If there were higher-paying jobs out in the sticks then surely that would just drive up prices there too? 2) What about the majority of people who don’t have a good degree (or any degree) and who don’t have a high IQ? Should they just shut up and get on with being a plebeian renter?

    I also disagree with RIT’s point about supply not being an issue, although I only have some assertions to back that up rather than actual evidence. 1) House prices collapsed in the US, Ireland, Spain etc after the financial crisis because of oversupply during the boom. That didn’t happen in the UK because there was no oversupply (this is after all the land of the NIMBY). 2) If we built 1 million houses a year for the next decade in a WWII-style blitz of government funded council house building, what would happen to house prices? My guess is they would more than halve from where they are today.

    As for what to do about it I would say vote in whatever party promises to deliver massive numbers of new houses, both council and private. Although of course that might be a bad idea depending on their other policies, but that’s another topic for another day.

  • 9 The Investor February 11, 2017, 1:52 pm

    @ermine — Very interesting contribution. The growing power of London in the Internet era is interesting. And it’s not just confounding in terms of work, there’s also say Netflix. Sounds silly but one way I justified London living in the 90s was I loved independent movies. Now I could watch them all day up a hill in Wales (coverage permitting) if I wanted to.

    Perhaps it comes down to smart driven and globally focused people wanting to live near others of their ilk (especially when you consider the other high house price cities like Oxford, Cambridge, and Bristol). The vote last year reinforced this. I’m even less likely to leave London than a decade ago, despite the barmy prices.

    See the first graph here — both a reflection and a cause of the bifurcation in the UK.


    It doesn’t seem sustainable, does it.

  • 10 PC February 11, 2017, 1:55 pm

    Sadly the Rapitude link goes to a post that has been deleted. There’s a comment that says the post is still on the way back machine but that is just showing the same deleted post now. Anyone found the original post?

  • 11 The Investor February 11, 2017, 1:58 pm

    @PC — That’s a shame, it was very good. I initially received it via email, but I can’t republish that. If anyone is keen to read it then drop me a line via the contact form and I’ll forward the email over.

  • 12 The Investor February 11, 2017, 2:22 pm

    p.s. I agree there are nice places and nice people outside of London / Oxford / Cambridge. When talking about macro-factors like this, we need to talk in generalizations.

    p.p.s. @RIT, @John and others — Good stuff, too mobile today to comment properly. But very much agree low interest rates can’t be only explanation given collapse in US, Spain etc. Then again those places clearly had *oversupply*, before.

  • 13 ermine February 11, 2017, 2:36 pm

    @TI that is a remarkable correlation. I would, however, say that increasing age is also strongly correlated with lower levels of academic qualifications. When I left university some 11% of school leavers went to university, it is now about half. So the older cohort will have lower qualifications on average. If there is purely and age-related effect it will show coincidentally as lower educational levels.

    @John Kingham Industry was spread more evenly in the past, when I was looking 30 years ago there were a fair few research facilities outside London. Yes, house prices around those would be higher, I paid a bit of a premium coming to Ipswich because a R&D campus of 4000 people in a town of 130,000 people did elevate prices a bit. But not the sort of thing you see in London, Oxbridge and the like now.

    The answer to 2) used to be decent council housing. About half the kids at my London grammar school lived in council housing, a fair number of the parents were in white-collar jobs. That became passe from 1980 onwards and I would venture the results are to be seen in the post-housing inequality chart in the article. I have heard the argument that selling a council house doesn’t reduce the stock of housing from laissez-faire boosters often enough, but what it does do is allocate the stock of housing more towards those with better access to capital.

    Re the part on IQ, from the fact that I moved out I clearly wasn’t sharp enough to be working in London or a similar hotspot 😉 But I was fortunate enough to be in an era of a wider spread of reasonable paying work. I do think house prices are a symptom of both the low interest rates and also the increasing polarisation of work opportunities into lousy jobs and lovely jobs

  • 14 Retirement Investing Today February 11, 2017, 2:38 pm

    In 2001 the average PE ratio for a first time buyer (source: Nationwide) was 3.0 and by 2015 it had risen to 5.1. So value has fallen through the floor.

    In 2001 the population of England was 49.4M (source: ONS Population Estimates for UK, England and Wales, Scotland and Northern Ireland) and the total dwelling stock was 21.2M (source: DCLG Dwelling Stock Estimates) for 2.33 people per dwelling. In 2015 the population was 54.8M with 23.5M dwellings for 2.33 people per dwelling.

    I maintain my view that it’s not a supply problem.

  • 15 EUOphan February 11, 2017, 3:37 pm


    Could you please email me the deleted item. Thanks

  • 16 IanH February 11, 2017, 3:41 pm

    I’m in agreement with RIT that affordability is the key element. Mortgages can be had for 1.25% for goodness sake. There must be so many people on these rates now that even a 1% increase in rates would see many people struggle with repayments. My first home mortgage I think was about 10% and in a year or two rose briefly to 17% – taking the whole of my salary. With borrowing rates so low it would be political suicide for the government to allow them to rise any time soon, but maybe gradual inflation can be managed without a crisis. We’ll see. I think I’d be very wary of taking out an “as much as they’ll give me” mortgage now.

    On the role of London I wonder if it is worth thinking of it like a mediaeval castle, with all us plebs clustered outside the wall scavenging for root veg, and doing the laundry for the landed gentry inside. Or perhaps even more apt, like a spacecraft that has planted itself in the south east, crewed by aliens only interested in sucking in all the resources available, and prepared to lift off leaving a scorched brown patch where London was as soon as things turn a bit rough, like with Brexit.

  • 17 The Rhino February 11, 2017, 4:05 pm

    Will it not get fixed simply when the incentives are right, I.e. in approx ten years time when all the MP s and those that have voted then in are from the generation that are suffering? Not quite enough representation yet to sort things out.

    Not quite sure how that skiing humblebrag made it into the links?

  • 18 Aron February 11, 2017, 4:14 pm

    Not sure if anyone else noticed but earlier this week TD changed their ‘Quick Start Fund’ lineup. It now solely consists of 3 Vanguard LifeStrategy funds, 20%, 60% and 80%.


  • 19 Edmund Blackadder February 11, 2017, 4:17 pm

    RIT has my vote. A £260,000 mortgage at 2.4% is considerably more affordable than (to use my parents as an example) a £20,000 mortgage in 1976 at 14%.

    Now, raising a deposit on the other hand…

  • 20 John Kingham February 11, 2017, 4:38 pm

    @Ermine – lousy and lovely jobs, very true. I think the long-run answer is a citizen’s income and life as an Eloi.

    @RIT – Ah yes but averages can be very misleading. What matters is how many households there are and that is going up faster than population because the average household size is decreasing. More couples have fewer children and more people live alone. So I still think supply is a major factor, but so of course is affordability due to low interest rates (assuming you can find the astonishingly massive deposit).

  • 21 dawn February 11, 2017, 4:42 pm

    looks like TI is beating himself up again for not getting into property.
    well I got into property early but came to investing too late at 49 . I had cash savings but never invested so it pains me to think what growth Ive missed out on. Id prob be FI now at 52 if Id started earlier in my early 20,s
    At least I did one thing right early on and TI did one thing right early on by investing.
    It would be a problem if you did neither of the two.

  • 22 SurreyBoy February 11, 2017, 5:31 pm

    I had a look at comparing my own start on the property ladder in 1996 to doing the same today. In 1996 my wife and I were a couple of years into our respective careers, post University. Joint income £39k. Our south London rent on a cheap flat and joint commute costs were £700 p.m. Saving for a deposit wasn’t a struggle.

    A quick look on rightmove, TFL and job search sites tells me that today our equivalent rent and commute would be £1200 and joint salaries around £50k. So again, saving for a deposit wouldn’t be too hard.

    This is the interesting bit. In 1996 we bought a decent 2 bed flat on the edge of south London for £100k. We had a 95k mortgage at 8% which was £730. Today that flat would cost around £280k so we would need to save £14k and get a 95% mortgage of £266k. The Nationwide website says that would cost around £1350 a month @3.39%
    Looking at those numbers makes me realise we had it pretty darned easy in 1996. There are two other huge differences to consider in our case.

    First, we left university with combined debts of around £4k (full grants, vacation jobs, minimal parental cash provided). Today we would likely owe £70k or more between us. Before anyone starts up about the student loan system being a great investment, my only point here is that it’s a huge amount of debt at a young age and repayments have to be made whereas for us that wasn’t the case.

    Second, I can see on Rightmove that a family home along my road sold for £260k in 1996. That’s in a leafy part of Surrey. Its pleasant, but not a road where footballers live. Today the owners of that house would slam the door on you if you offered them under a million quid. In fact I’m guessing it would cost £1.1 million or more.

    So trying to compare our younger selves to a modern equivalent makes me realize we had it very easy 20 years ago. I think we would still be able to get the first flat in a still unfashionable patch of south London, but it would be a far heavier burden. As for moving up into a family home, with kids and a wife that took years out of work to look after them – that would be completely impossible with houses in SE England at their current value.

  • 23 Mark Appleton February 11, 2017, 6:11 pm

    Please send me the deleted raptitude post.
    Many thanks.

  • 24 JonWB February 11, 2017, 6:48 pm

    @EdmundBlackadder – I would much rather borrow £20k at 14% than £260k at 2.4% in exchange for the same asset, especially as that borrowing will inevitably be a naked unhedged interest rate after 1/2/3/5 or by exception 10 years.

    The root of this problem is that capital isn’t taxed and neither is peverage

  • 25 JonWB February 11, 2017, 7:47 pm

    The root of this problem is that capital isn’t taxed and neither is leverage resulting in tax free capital gains. If you have had success with leverage (the story of residential property in the UK in the past 40 years) you are golden – a good job/salary is not going to beat that.

    Posting from 35,000 ft on a Norwegian flight on a phone – so apologies for any more posting blunders.

    I can borrow 75% LTV on an interest only basis at 2% for 5 years right now with a 25 year term with HSBC. This means:
    1) I can release a huge tax free lump sum – well into 6 figures.
    2) My entire interest costs over 5 years equate to less than 30% of the equity withdrawn (so the risk of default in near term is close to zero even if I have zero income).
    3) The equity withdrawal allows me to manage my tax liability via cashflow (e.g. max out ISA plus pensions whilst working part time) allowing me to pull further ahead of those that can use this opportunity.
    4) My interest only cost is a healthy 5 figure sum per annum less than if I had to privately rent the same property (with that extra rent money having to come from post tax income, which just compounds the difference).
    5) I can redeem the mortgage after 5 years if interest rates sky rocket as I have plenty of available capital (even with steep falls).

    But there is nothing special about housing. You can leverage 6 to 1 on long term gilts with no proof of income, or 4 to 1 on stocks on the FTSE with very low borrowing costs.

    Indeed property prices have lagged long maturity bonds – and by some margin. Whilst house prices are visible it is the invisible aspect that is worse for those who do not have capital.

    If you don’t have capital now, I think it is going to be much, much harder to generate it in the future – all opportunities to leverage under favourable conditions for the ordinary person are vanishing and the outlook for long term returns is worse. There are tax rises, suppressed earnings increases and sky high prices for a lot of income producing assets – so the buy in peice is much higher.

    For property they need to extend the enveloped dwellings tax to all property and make the council tax payable by owner not occupier, and charge twice the amount for BTLers. The owner who isn’t an occupier than has to fund it out of post tax income.

    If they moved to a position of an annual ad valoreum property tax and abolished stamp duty it would generate many more tranasactions. Right now there is such a disincentive to move (massive round trip tax and transaction costs) and a very big incentive to sit on your hands or extend your existing property (no tax and no transaction costs).

    I can see a crash as more and more £1M+ properties enter probate in the South East. It will be much harder for beneficiaries to pay the tax bill without being forced sellers – the mortgage market review has seen to that. Whilst the hot foreign money entering London provides the ample equity for buying £1M+ homes in the South East as people sell to them to move from London to the South East, there is a real danger of the hot foreign money drying up – it is fickle and can move elsewhere.

    @ermine – yes professional career progression is much faster, but I think it is working both ways. Faster on the way up, but also faster on the way down. So the need to accumulate capital is important – I doubt I will be able to earn in my later 40’s and 50’s at the level I can now.

  • 26 dearieme February 11, 2017, 8:21 pm

    If someone thinks that feudalism involved a rootless peasantry he hadn’t paid attention at school.

    I’m glad that Merryn got her heart’s desire of a red mini; now, who’s going to tell me what “ambient lighting on the dashboard” means?

    “When the Conservative party took power in the coalition government in 2010”: no, they didn’t take power, as implied by the word ‘coalition’. What a chump. But it’s a magazine for accountants. The BBC probably counts accountants as educated people.

    “young people – who also face student debts … low wages”: come off it. You know perfectly well that while they are on low wages they are exempted from repaying the debt.

    RIT proclaims “I’m yet to see any data that has convinced me it’s a shortage of housing that is causing silly house prices.” I wonder whether he’s right. I get the impression that rents have increased more modestly than house prices, which might support his view.

    Jobs moving to London: many years ago I had a thoroughly interesting job near beautiful countryside far in the North. But there were no jobs for my fiancee, so it was off to a proper city for us. Could the Working Wife be one contributor to people moving to the Golden Triangle? The Working Wife is presumably a contributor to rising house prices. Is she?

  • 27 William III February 11, 2017, 8:32 pm

    Just to continue a thread from a previous post. I, too, love London. Its art, its people, its leading edge jobs – its underground electronic music scene. But it’s a victim of its own success and some grand rent seeking behaviour of ‘elites’ as you describe above. As you said you’ve got too much going on here to leave, so let me guess you’re in your late 30s? I’ve just turned 30 and all my friends are moving/planning to move (guardian article resonates). So what’s the point then of having Corsica studios around the corner with great nights? I’m not the type who enjoys going there alone. So there’s the difference between us I think. I’ll be voting with my feet, like my friends, none of whom own property, and build something up elsewhere.

  • 28 hosimpson February 11, 2017, 9:15 pm

    I agree with @ermine – the main issue is London property prices (similar to Oxford and Cambridge and Bristol). A concentration of talent drives opportunities drives concentration of talent drives opportunities… and it tends to be expensive there because the top stratum of said talent as a rule well compensated, and the rest of us get a bit of a shock when we look into where we stand in relation to that.
    Having read the BBC article, one other thing that stands out to me is the increase in the “running” cost of living for the young by way of an increase in the number of items classed as essentials. In the article the couples talked of the sacrifices they had made so they could buy a property by 25. Their lists included things such as foreign holidays. I’m not going to start rolling boulders from my glass house, but frankly, I think there are quite a few things people who are now in their 20s are paying for monthly that older generations didn’t necessarily have in their budgets when they were saving to buy a house – things such as “essential” gadgets (personal computers, smartphones), mobile phone+ data plans, Sky, and yes, foreign holidays. These things are no longer seen as luxuries.

  • 29 Sally February 11, 2017, 9:31 pm

    I hope you were drinking a nice glass of Chateau de Chassilier while writing this post. Whilst it is your (bloke-)blog and you can rant if you want to, my experience of the property market is closer to Ermine’s than yours. Bought studio flat 1988 on 10% deposit (scrimped like your linked BBC young buyers) & 4 x income endowment mortgage (please don’t forget what a rip-off those were) + MPPI to protect the building society, only to sell for 45% less in 1993. Bought family home with future husband in 1994 with deposit from our redundancy monies (twice in my case, not fun) + large multiple of joint income + inevitable MPPI.
    If it is any consolation to you, house prices are fast collapsing in South London due to MMR and the rises in stamp duty. I accept that this is fair except that “my” estate agents are DESPERATE for any sale and have repeatedly ranted at me (late husband cannot be of assistance) to reduce my price, repeating every negative comment about my house from people who don’t even have their own property on the market. At the risk of being Barretta Blimp, it ain’t pretty out there.

  • 30 mick February 11, 2017, 10:40 pm

    I feel for youngsters who have little prospect of owning a meaningful stake in a society that expects them to produce the next generation whilst not affording them the means to house that next generation.

    For what it’s worth here’s my view on some of the problems:

    1. Women working. Doubling incomes didn’t end up meaning couples could buy better houses – just more expensive as they out bid each other. This has also had an arguable detrimental effect on society generally as children were farmed out for day care.

    2. Loss of social housing. An excellent idea at the time but much of this stock has never been replaced.

    3. BTL.

    4. Lending rules being relaxed again inflating amounts being borrowed and consequently prices.

    5. Population growth.

    6. Ultra cheap money.

    On the face of it i’ve benefited from this lunacy – except i’ve got a 16yo who will find it incredibly difficult to fly the nest.

  • 31 david m February 11, 2017, 10:46 pm

    Thanks for the links. The Ben Carlson article on the Bogle model beating the Yale model was interesting but 6% and 5% compound growth looked unimpressive over the ten years to June 2016. Over the same period the average UK equity income investment trust (6.8%) has beaten that.

  • 32 The Rhino February 11, 2017, 10:53 pm

    @sally there seems to be a large gap in your story between 1994 and 2017. Anything interesting happen in those years?

  • 33 TenMoreYears February 12, 2017, 12:14 am

    Nothing to do with this article, but thought the community would like to know that FIRE has gone grime! Generation Z is going to go far. https://m.youtube.com/watch?v=9VAsCZLW4vk

  • 34 John B February 12, 2017, 12:16 am

    @JonWB. Re your probate point, the government have foolishly stopped that hope for house price decline by introducing the daft housing IHT allowance, so soon your £1m property will be covered (for a nuclear family)

    I wish CGT was an accumulating allowance, and applicable against all asset disposal, set at £10k p/a and taxed at 20% it would have better handled all the North Oxford academics who’s houses have earned more than they have.

  • 35 Learner February 12, 2017, 12:32 am

    “The few who didn’t even avoid having too many Sunday lunches in the local gastropub”

    Boy that made me flinch. It is just so.

    “Maybe houses prices will yet fall to a sensible level.”

    NYT ran a story along those lines yesterday:
    https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in-the-american-mind.html [US but relevant, to borrow a phrase]

  • 36 optimistic February 12, 2017, 1:45 am

    We all tend to view the world from our own narrow perspective and assume the future will resemble the present and recent past, both are mistakes.

    The housing market is a collection of very different local markets, buying a house is the result of not only price, deposit requirement, local wage levels, interest rates…..if a situation is truly unsustainable then it will not continue….

    Perhaps you might wish to reflect that most people are not living in London, Oxford, Bristol Etc

    I suspect a major stumbling block for many is the deposit requirement, I bought my first house with a mate on a whim, it seemed a good ide at the time…. , 100% mortgage availability and from the initial idea in the morning, mortgage arranged, mate persuaded and house bought the same day! ( edge of west London)

    I was prone to acting rather hastily when I was younger, sold the house within 9 months, made a 25% gain , quit my job and headed west and …..

    Not wishing to be another 50ish Barry Blimp, something’s were tough then and some things very much harder now but I’d take youth anytime. I found myself at 20 with about £50 and a free one way ticket from the dole and left a ‘depressed’ area to travel to more prosperous regions with total confidence it would work out, it did.

    I understand the draw of London, the energy and confidence is great, it is not surprising that it is expensive now, it wasn’t cheap then and I’m not sure the housing market can be fixed easily but perhaps a relaxation of lending rules and housing restricted to lower earners to create a second restricted housing market would help ?

    On the south coast where I am now, prices are much lower, wages are lower but job availability is good and affordability here is determined purely by access to a deposit. If you can afford to rent, then if you have a deposit then you can buy for lower monthly outgoings. In that sense this local market could be ‘fixed’ by returning to 95-100% mortgages , with say a 5 year plus fixed rate to provide some stability of costs.

    The UK consists of lots of micro markets and I suspect that different policies are needed in different locations and no single housing policy will ever work.

  • 37 Mr optimistic February 12, 2017, 1:47 am

    Is it a way to keep us all on the threadmill?

  • 38 Naeclue February 12, 2017, 2:18 am

    Just to add to what Ermine has said regarding the changing nature of London. I started work in London after graduating in the early 80s. I worked for a engineering consultancy with clients in the defence industry. We were all graduate scientists and engineers and the pay was quite respectable, but taxes were a lot higher then. My girlfriend (now wife) and I bought our first flat after a couple of years. That was probably ahead of our peers, but not greatly so. It helped by us living for a time in a very low rent decrepit flat in Clapham, which was far less popular then than now.

    I moved jobs a couple of times, but stayed within the engineering industry. By the end of the 80s though, I was faced with the choice of moving out as my company was leaving London, or getting another job. Like others here, we hated the idea of leaving London at that time, but I could not find another job in science/engineering – they had all gone. So I took a job in finance instead. This was very easy to do as finance was desperate to take on scientists and engineers back then, especially those with the S/W skills that the banks were moving into. VAX/VMS, UNIX, C programming and ORACLE/SYBASE skills were hugely in demand, but run of the mill skills in engineering. Not only were jobs easy to get, the pay was substantially higher and rising fast. Essentially finance exploded. Pay in related jobs, such as in law, accountancy and management consulting also went sky high as the foreign banks especially seemed to be prepared to pay silly amounts of money. I am sure it was this huge influx of finance, and outflow of other jobs such as in traditional engineering that forced up pay, which then flooded into the housing market. Houses shot up in price (although there was a dip in the late 80s/early 90s), but pay matched it, so houses remained affordable for the people working in finance related jobs, but increasingly became unaffordable to those in other jobs, apart from those in very senior positions (CEOs, FDs, etc.), who also managed to ratchet up their pay.

    I retired a few years ago, but from what I have heard, pay in the financial sector has at least plateaued and is probably coming down in real terms. I think this trend will likely continue, as the industry has figured out that the skills required are not actually that demanding and people do not have to be as smart as many working in finance would would have you believe. There are plenty of graduates around who can do the jobs and there are a lot of graduates in places like Poland who will do the jobs for substantially less money. Brexit as well has done City workers no favours at all. It may work out OK, but nobody knows. The uncertainty is certainly putting off many who work in finance from buying property (especially foreigners) and when property prices go down, that also puts people off buying. So hopefully the London property boom will now be over and the prices will edge down so that teachers, doctors, etc. can afford to live here again.

    Wishful thinking?

  • 39 Mathmo February 12, 2017, 2:51 am

    TI – how wonderful to have a housing rant back again! I’d prefer it didn’t come with the suggestion that anyone who disagrees with your position should be called names as it leaves one feeling a little awkward when confronted with something one doesn’t necessarily think is right at first glance. But I was listening to a rather excellent Freakonomics episode this week that left me thinking that it’s in looking at those whom we think are wrong that we get to learn how we ourselves are wrong and thus gain a better knowledge of the world.

    A place to live is the fundamental good, not ownership of the asset (all mentioned points about renting noted — also noted that flexibility and legal obligation on landlords not mentioned) — I find RITs view compelling that renting hasn’t in fact become much more expensive and high asset prices are the natural conclusion of low interest rates. I do think that we are supply constrained (rents are after all rising) and London has changed in the past 30 years in a one-off way – becoming a global capital. It might yet step back from that. You don’t hear about students taking to the street to denounce the older generation for taking the FTSE100 up from 1,000 to unaffordable and ridiculously high levels by TI’s greedy accumulation of assets with his saving? Why is housing different and subject to moral outrage?

    The existence of leverage? TI can probably get margin on his portfolio to go harder if he wishes to.

    The tax advantages? As noted the ISA is pretty epic and good enough for most people (see also: SIPP) and neither accepts residential property.

    Is it about the IKEA pictures? The fact is that you can bang them into the walls — it’s just that you need to make it good afterwards. Just as the landlord does when he puts up his pictures.

    Do home owners naturally adhere to FI principles by being so squeezed early on? More frugal and with higher (enforced) savings rates. Is it any wonder that in their 40s they are able to enjoy a more expensive lifestyle that those who spend their entire paychecks experientially in their youth? Or is that Barry talking?

    Shouldn’t the poor home owners be out marching on the TI-types out there? Our poor distorted portfolios will almost always be ridiculously over-exposed to one asset class, while he is able to rebalance nimbly. We probably would, but we are stuck inside fixing our assets, desperately trying to stop the inevitable collapse and waste in a way that TI simply sits back and lets the CEOs of dozens of businesses do for him all day, every day. It’s all very well pointing out that home owners have rose-tinted spectacles on rental contracts, but at least like Tiresias we’ve seen both sides. Are we too, like him (assumed pronoun preference) to be punished?

    I’m writing this in a house that would be illegal for me to rent out: it is outdated technology, last renovated before the moon-landing you mention (in opening up the floorboards, we found a newspaper from 1963) and I can’t afford to move to another space while it is fixed around me. No kitchen. No shower. No toilet flush. (Still have internet: I’m not a savage). Shall I complain to the mortgage company and withhold my payments to them? Hardly seems like a good idea.

    So is it about inequality? Is there an issue that some people bought what turned out to be a great asset and others didn’t? Well that’s certainly unequal. But should we do something about it? I missed Facebook so can I get some of that cheap please? Do the gini graphs really show what TI says they do? What are the housing costs for the wealthy? The interest on the borrowed capital? The foregone investment return on the unborrowed capital?

    Sorry – all a bit long-winded and I’ve missed all the reading for the week (as mentioned elsewhere, Authers is excellent this week). I’ve no idea if “something must be done”. It’s far from clear to me that it must, as I don’t really know what the issue is. Young people can’t buy expensive assets. Got it. Buy a place in Scotland and rent in London if you really want exposure. Save more and invest in cheap trackers — the sort of thing your parents didn’t have available to them. Travel. Reject cities. Be free. Avoid DIY. Pray for the crash, lobby for tax changes, and hope to inherit. Vote. I don’t know.

    Is the problem that people can’t rent in London? Live further out than you’d dream of. Use transport. Build more houses on the brownfield sites of London.

    Or is the problem as JohnWB indicates Picketty’s one of Capital? In which case, TI, isn’t that a (rented) glasshouse you are standing in over there?

  • 40 Ben F February 12, 2017, 4:01 am

    Back to the only issue that matters.

    Banks issue fresh credit against land. Banks are not intermediaries of funds, they create new debt on demand. That’s how our “money” is created.


    The rentiers (unproductive mainly land monopolists) should be taxed. Henry George got this over 100 years ago:


    Everything else is a side issue.

  • 41 TahiPanas February 12, 2017, 7:05 am

    The number of variables when contemplating any of the several housing markets in the UK, is truly mind-boggling. To mention just a few, we have: supply and demand, relative taxation benefits, regional employment prospects, politics, interest rates, demographic changes, salary growth and inflation, immigration, the state of the economy, foreign inward investment and so on.

    As a result, even the most contradictory arguments presented above seem reasonable to some extent. That I feel is because, inevitably, they are only part of a complex story that is forever evolving and impossible to predict. We cannot distil so many variables into a universal investable truth, a complete but handy-sized synopsis, despite our understandable human desire to try to do so.

    But does that mean buying or renting a tent and burying our heads in the sand? Well, of course not. Despite the impossibility of the task, we must each make our own best judgement of how to proceed.

    I find that there is one helpful metric that, with all the above limitations, is often useful in trying to predict the housing market even if only on a very big picture basis.
    The Credit Cycle handily explained the major high and low turning points in the dotcom and pre-financial crisis housing booms and holds fast today. It conveniently accommodates the current low interest and quantitative easing environment.

    But it is only one of many factors.

  • 42 Passive Investor February 12, 2017, 9:50 am

    @RIT. Demand for housing is high – increasing population, increased longevity, divorce and single parent families. Supply is low due to restrictive planning laws and uneven economic growth (ie the London effect). Add in the lowest interest rates for generations and it seems fairly clear to me why house prices have risen so disproportionately.

  • 43 Passive Investor February 12, 2017, 9:53 am

    By supply low and London effect I meant that the areas housing is needed are already some of the most densely populated. Though I read somewhere that London is actually quite sparsely populated compared with other international cities (due to mainly low rise building)

  • 44 Passive Investor February 12, 2017, 10:15 am

    @ RIT @JK I should have read down the thread before posting. I agree with RIT that the figures on population and occupancy are striking. But the housing market is local or regional at very least. As in extreme example if all the building was in the north and all the demand in the south the figures you quote wouldn’t illustrate the problem. As an example in the south Manchester suburbs where I don’t live but have some local knowledge I think there has been minimal increase in flat / small house prices since 2000. (Ie There was a big bubble in the late 90s which hasn’t recovered from its burst). Another complicating factor in London are the speculative purchases of empty properties by foreign owners. Overall though the economic law of supply and demand determining prices is so robust that it really would require a lot of evidence to refute the claim that this is at the core of the house price problem. IMHO at least.

  • 45 Mathmo February 12, 2017, 11:06 am

    Foreign purchases are a good point to mention, PI. These are asset purchases pure and simple — but often with a stronger motivation than simply fancying the asset class. If you live in a country where the rule of property ownership is not so well established as here, you may well look at your wealth and decide that even a property that yields no income (ie an empty London flat) is — like gold — a safe haven which may appreciate and be safe from seizure. Very hard for Putin or Xi to grab your two-bed in South Ken.

    You don’t have to imagine that many of the 150m Chinese middle class want to do a lot of offshore investment before they can really have an effect. One of those effects will be propping up the pound, another will be puffing up prime (ie London) house prices. Turns out that along with guns and legal/accounting services, one of our export strengths is London housing. We should make more of it. If our film industry gets to build on greeen belt to help its international competitiveness, then surely our housing industry could make better use of the brownfield sites inside the M25.

    At dinner last night, an antipodean friend was recounting how the Sydney property auctions were dominated a few years back by Chinese capital flight and its consequent insensitivity to prices. Local auctioneers reported than 40% of attendees and 80% of winners were foreign chinese.

  • 46 The Investor February 12, 2017, 11:21 am

    @all — This is a really excellent discussion, which I’m enjoying very much. Thanks all. Everyone’s probably heard enough from me so I don’t feel there’s a great need to re-chip in with my two bitcoins — except to say that I think there’s multiple reasons why people might be interested in the UK property market, beyond (or instead of) thinking something Should Be Done from the point of view of keeping people dry and with somewhere to watch Game of Thrones.

    There are the wider political issues, but most of all the UK consumer economy and much of our wider economy is dominated by housing. If the housing market is over-stretched, and thus vulnerable to turning south, we’ll all eventually feel it someway or another. Maybe not quite so much of an issue for the global tracking passive crowd (although of course there are plenty of non-portfolio risks, such as losing your job or dependents coming back to live on the sofa, etc, as discussed by Lars on this site on Friday) but for anyone with active UK investments, listed or unlisted, critical. And of course there’s a huge BTL contingent out there for whom it’s important too, albeit this isn’t the most sympathetic stomping ground to that asset class (as opposed to the individuals themselves!).

    Oh, and yes, I probably should not have brought my favourite stock villain into the piece for this one. He’s had enough airtime recently… Fair cop. 🙂

  • 47 Mr optimistic February 12, 2017, 11:28 am

    Trying to avoid being Mr Blimp, back in the pre-dark ages (70’s) there was always a concern about getting on the housing ladder which then implied opening an account with a Building Society to establish a relationship and hopefully the scene for getting a mortgage from them. Banks weren’t allowed to sell mortgages. However the pressure was in acknowledgement that houses always seemed to get more expensive and you needed to get on the ‘housing ladder’ even then.
    However there was no idea of houses as an investment and source of income. A house was literally a home.
    If we must involve the government in this, morally I would rather put pressure on the buy to let investors than forcing people to sell up because of high inheritance, property taxes or mortgage interest rates.

  • 48 PC February 12, 2017, 12:55 pm

    @TI many thanks for emailing the Raptitude post. It is very good.

  • 49 K. February 12, 2017, 2:43 pm

    Had a long friendly chat with an agent in London – he complained that landlords scream at him as they cannot get any offers even after dropping the previous rent. Obviously, BTL amateurish landlords.
    The same is with his body in sales…
    He said landlord/owners are just keep the flats without tenants for now and wait for the time they start growing again.
    He gave 18 months – either market starts growing in London or all start selling the property…

  • 50 Financial Samurai February 12, 2017, 4:08 pm

    I’m glad you’re not buying now. The price declines will take at least two years to pan out. Already seeing price declines here in San Francisco.

    The winter of 2018 might just be the right opportunity for you!

    Thanks for highlighting one of my articles.



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