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Once I’d finished kicking myself, I allowed myself a wry smile on reading the latest house price survey by UK Value Investor. It brought back a lot of memories.
John entitled his post UK house price forecast: It’s not looking good.
But I was thinking that for me it might have been called A little knowledge is a dangerous thing.
The source of my dark mirth was the following graph. It shows how the average house price moves through bands of apparent over and under-evaluation over time, as defined by a deviation from the longer-term norm of property prices to average earnings:
Prices are cheaper in the greener band and most expensive in the red.
Source: UK Value Investor / Halifax
When I look at that graph, I’m taken through the story of my adult life.
In the mid-1990s, fresh out of University and already with an eye to a bargain, I was urging friends to buy their own home. I can vividly remember reading an article in The Sunday Times showing how the price-to-earnings ratio for London property had hit an all-time low in the wake of the early 1990s house price crash. (Yes kids. Really).
It’s hard even for me to believe now, but the meme back then was that buying was so over, and that Generation X would usher in an era of renting. (Which has eventually happened with the Millenials, but not exactly out of choice.)
As you can see in the graph, I got ‘anchored’ in 1995, as the behavioural economists say, to very low prices. Unfortunate.
I wanted to buy, but for various reasons I didn’t – I’d only had a job for six months and I knew it was the wrong one, the £5,000 or so I’d saved as a student (!) didn’t go far, and I was greedy and wanted to buy in gentrifying Clapham Old Town, not Brixton where I actually lived.
What was the rush? Nobody wanted to buy. A couple of years of frugal living and hard saving and I’d swoop in like Hetty Green.
When I moved out of London for a couple of years to a new job, I urged my new friends in the provinces to buy there, too, as the infamous ripple rumbled beyond the M25.
Incidentally, these friends have finally stopped thanking me for first putting this idea into their heads, either because they have forgotten, they are too-embarrassed by my ongoing property penury, or they’re too busy going on holiday with all the money they save from paying £200 a month for a four-bed house in the best part of town.
Which is fair enough, obviously, but being remembered as the kindly savant did soften the sting a little…
Trees that grow to the sky
Back in London in the early 2000s – and with a combination of nearly 10 years of savings and access at last to sufficient self-employment records to please the bank manager – I put in an offer on a two-bed in 2003.
And then there was a snag with the paperwork. The mortgage agent suggested, in essence, that I make something up.
I dithered.
Truth is I dithered not only for moral reasons. I was now telling my friends that I thought property was becoming truly over-valued in London, and I was risking ten years of savings from a very ordinary basic rate taxpayer level income in the face of a potential crash.
If my London friends who heeded this terrible call still remember it, they are kind in (generally) not mentioning it. Swings and roundabouts, I suppose.
Look at the graph above and you can see my fears. Prices are moving into the orange zone. My gut call was right. But my crystal ball was murky, and history had other ideas.
Remember, we couldn’t know then what would actually happen next.
Here’s what happened next:
How price to earnings ratios have moved into the stratosphere.
Source: The Guardian
This graph – from The Guardian – shows that average London prices are now more than 14 times earnings, according to the property specialist Hometrack.
The unprecedented eight-times peak that had me quailing back in 2003 looks positively pedestrian.
Non-buyer’s remorse
What a palaver. For the record I did look at a few properties in 2010 (partly as a result of helping a friend who didn’t want to view them on her own) and thought prices now looked a tad more sane.
I wondered if it was time to stop the bleeding.
Alas, that mini-crash lasted about six weeks and my firepower had been smashed to smithereens roughly halved by the financial crash. Which left me feeling guilty as well as keeping me renting.
Some readers have told me over the years to stop complaining, and just move and buy. I am complaining to some extent I suppose, but it’s a sort of rueful self-knowing complaint.
It is what it is, as my younger friends say. But that doesn’t make it “right”. (Substitute rational, fair, sustainable, predictable, a good bet, or whatever other word you like – I’m just using it to cover the waterfront, not to imply a deep moral injustice).
I can buy, even in London, albeit because I’ve basically turned myself into West London’s answer to the early Warren Buffett.
But that doesn’t mean I will, or even should.
Bailed out by the bond bubble and the BOE
I understand anonymous commentators on the Internet are all geniuses. Their property purchases were wise, prescient, and it’s entirely in the proper order of things that their homes now cost 10 times what they paid for them, and that they couldn’t afford a shed at the bottom of their garden if they had to buy today.
That’s nothing – you should see them at the races!
But let’s be honest, if you were told in 2007 that the world was about to face a once in five generations financial crisis, would you honestly have thought London property prices would be trading at more than 14-times earnings some six or seven years later?
I sold most of my bank shares before the worst of the crash hit because I was convinced high debt was part of the problem, although I didn’t in any way understand exactly how in the way we all do now.
It was also part of the reason why I was nervous back in 2003 – I saw ill omens all around, particular with spendthrift friends buying flats via credit cards and parental handouts.
Ho hum. Moral hazard has been on holiday for a decade.
Other people say “of course property prices are very high, bond yields are very low.”
To which I say: Unconvinced. Prices are not at anything like such high levels in the US, which had a bigger crash and for a long-time as low or lower bond yields. Nor the big cities in Germany and Spain where ten-year yields are from time to time negative.
Oh, and anyway I’m not going to condemn myself too harshly for not to have anticipated the property bubble would be bailed out by 5,000-year lows for interest rates.
Brexiteers to the rescue?
Clearly all property markets are local to both time and place, which it took me too long to fully understand. The UK economy – and more particularly London – has been doing very well in a world that’s been doing rather poorly.
The brilliant Brexit may now burst the London property bubble, but then again it may not.
I’ve seen the thing stagger back onto its feet too many times to stomach the confident soundings of a new recruit. I’m more like one of those hardened zombie-fighters that the prettier and younger movie stars find holed-up in the top-floor of a crumbling tower block.
They think the worse is over. I’ve seen it all before.
A little knowledge is a dangerous thing. On the other hand, my experiences (and that housing deposit I never deposited, but instead put into the market) has helped make me the investor I am today. And I’m pretty content with that guy’s record.
Still, I can’t deny it’d be nice to be able to knock a wall down now and then.
Have a great weekend.
From the blogs
Making good use of the things that we find…
Passive investing
- Don’t bother reading this – Jonathan Clements
- Good summary by SCM of last week’s FCA report [Embedded doc] – T.E.B.I.
- Low-vol investing “is not worth the brain damage” for most – Alpha Architect
- What fraction of international smart beta is dumb beta? [Research] – ABWorks
Active investing
- Bonds down, stocks up! – The Brooklyn Investor
- Value investing coming back into fashion in Europe – The Acquirer’s Multiple
- The share price should not be the focus – The Value Perspective
- Doubling down on an investment in Valeant – Musings on Markets
- ‘Do half’ applied – The Aleph blog
Other articles
- How bad could bond losses get? – A Wealth of Common Sense
- “Passive investing is active investing in aggregate” – Warren Buffett
- 7 things I learned stalking Warren Buffett – David Kadavy
- Efficiency is the highest form of beauty – Mr Money Mustache
- How matched betting taught me to appreciate my job – 3652 Days
- Dumped by Goldman Sachs – Fire V London
Product of the week: The new 2.2% NS&I savings bond announced by Phillip Hammond in the Autumn Statement is getting short thrift. ThisIsMoney quotes one pundit who says the Chancellor is “papering over the cracks”. The 2.2% three-year fixed rate isn’t the problem – depressingly it’s a table-topper, even though after rising inflation it’s likely to deliver a negative real return. Much worse is that you can only save £3,000 a year into the bonds, which will net you £66! You’ll have to wait until next Spring for this particular dream to come true.
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
Brexit still looking a great idea update
- Britain’s Autumn Statement hints at how painful Brexit is going to be – Economist
- Britons face a “dreadful decade” of wage stagnation, IFS warns – Bloomberg
- Reality check: How much will Brexit cost? – BBC
- Martin Wolf: Brexiters choose to target the messenger [Search result] – FT
- Ex-Prime Ministers warn of Brexit buyer’s remorse – Bloomberg
Passive investing
- Investors turn towards evidence – Morningstar
- Hedge fund vet Steve Cohen is putting money into a passive startup – Bloomberg
- Jack Bogle Q&A: “We’re in the middle of a revolution” – Bloomberg
- Interview with Larry Swedroe about his new factor investing book – ETF.com
Active investing
- Inflation: What’s really going on? – Interactive Investor
- Private equity is sitting on a humongous pile of cash – Bloomberg
- Is the Trump-driven share rally delusional? – Interactive Investor
- (Some) hedge funds are tightening their belts – Reuters
A word from a broker
- Be careful about betting on infrastructure – Hargreaves Lansdown
- Low bond yields are here to stay – TD Direct Investing
Other stuff worth reading
- Autumn Statement 2016: At-a-glance – ThisIsMoney
- Autumn Statement: What it means for your money [Search result] – FT
- Buy into a pension while tax reliefs last [Search result] – FT
- How to earn £27,000 a year tax-free – ThisIsMoney
- Will banning letting fees push up rents? – Guardian
- One writer’s year of not spending anything is over – Guardian
- How much is enough? – The New York Times
- 33 million millionaires own nearly half the world’s wealth – Business Insider
- The signs that civilization is about to collapse [Excellent podcast] – Bloomberg
Book of the week: Investing Caffeine this week looked back to the fall of the Long-Term Capital Management hedge fund in the late 1990s. If I knew then what I know now, I’d have been a lot more worried than I was. Curious to learn more? The Kindle version of Roger Lowenstein’s classic account – When Genius Failed – is just £5.49 at Amazon.
Like these links? Subscribe to get them every week!
- 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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Chin up. It could have been worse, and you could have been a young pup like me anchored on house prices in 1989 and stupid enough to buy a house in 1989. The market cycles in housing are longer than stock market cycles, too, looking at the rainbow the cycle time is about a decade, that’s the first and most dangerously undercapitalised first third of a working life to suck up a hit 😉
You did well in other asset classes, and you have the choice now. Whereas if you anchor on a market high, you take all that shocking risk of exposure to negative equity in that first third of your working life. That really isn’t a fun ride at all, and the downside risks risks are higher now than they were for me 27 years ago because earnings multiples are higher, jobs are less secure and interest rates are at historic lows.
Hi TI
Thanks for your commentary on John’s analysis, insightful as usual. It reminds me of what was said by Keynes, (& others), “Markets can stay irrational longer than you can stay solvent.” I guess this applies to property as much as stocks.
> “Prices are not at anything like such high levels in the US”
Of course, in the US and other countries, land is more plentiful & more importantly the planning laws are not the same. I suspect our planning laws have a lot to do with property prices by suppressing the supply side even at times of high demand.
All the best
Ric
“Markets can remain irrational longer than you can remain solvent”
Keynes was actually talking about investing with borrowed money (he ran what was basically a hedge fund for a while)
Investing with a high degree of leverage using short term debt is exactly what UK house buyers are doing
This investment approach looks like investment genius… until it doesn’t
I’ve no idea if you read my comment on the Pensions vs ISA post the other day, but basically, you are me. Probably a few years older, and definitely a better investor, but in spirit the same.
The insanity of the ‘property’ market has turned me into the man I am today too, and I wouldn’t change a thing.
I’m ruthless now with maximising my income, liquid, solvent and work only the amount that makes sense. I’m proud to be a well rounded person that makes their own decisions, takes responsibility and doesn’t require validation and you should be too.
Keep fighting the good fight.
Perhaps you will finally have your buying opportunity soon. I’ve been building a municipal bond portfolio over the past two weeks since the US election as interest rates rose about 50 basis points. Higher interest rates will slow down the property market at least you’re in the United States for two years by a 10% cent price loss in my opinion.
Sam
@all — Incidentally, I meant to say that John’s graph is coloured by the bubble that has unfolded pulling up ‘fair value’. So when I saw the price retrospectively was nudging into orange back in 2003 (and my ‘gut’ was right) you have to realize at that point the P/E multiple was already well into the red for London, and at an all-time high. It’s only the further highs that retrospectively make it look less bubbly.
@ermine — Thanks for the sentiments, but no consolation for me there I’m afraid. Some people owned houses that were blown up in the Blitz and while I feel bad for them that’s irrelevant to my decisions. I feel the same way about the late 80s spike now. It was nearly 30 years ago, and feels irrelevant to me. The fact is I could have bought in London at any time in the past 20 years bar maybe the past six months and made a profit (levered up by a mortgage).
I have played it very poorly indeed.
True, I have kept up — just — with that first Clapham flat I never bought, but that’s misleading. Because if I had bought the flat AND then become an investor, then I’d be far richer on the excess cashflow I’d have enjoyed. (And with most of the purchase price having been paid for by the bank, to boot).
I always knew this was the great thing about property — I’d read up by age 22-23 on the whole subject — which was why I was looking to buy in the 1990s and suggesting to others they do.
What I didn’t know was how quickly prices would rise (it was mad) and for how long (it’s been unthinkable).
When I was running the numbers on that first flat, I was looking at a two-bed and renting a room out to my then best friend, who I was living with anyway as renters. His (keen but not fully mate’s rate) rent would have been enough to pay the mortgage and make the house purchase effectively free, which gives total lie to the “rates were higher then, so affordability has always been the same!” line.
Of course this was pre-BTL etc, and as I say above I was anchored at the bottom of bear market. But that lesson has proved useful at other times. 🙂
The interesting maths would be if the London market stops or even slides and yet I do with my portfolio again what I’ve done in the past 10-15 years. Finally I might be able to say the whole detour was worth it. But look what I’ve had to become to do so! 🙂 Would have been far easier just to buy the flat in the ’90s.
On the other hand Monevator would be a blog about interior design… 😉
@Ric — Sure, that’s true of the US. But not true of say Japan, where prices crashed and stayed crashed (despite negative yields), there because of demographics. 🙂 And so on and so on. The point is there’s always a confluence of factors. I do think this confluence has got harder to ‘game’ since I began paying attention, at least with London property, principally because of the flows of foreign money and also the financialisation (via BTL) of residential property.
Anyway, I just mentioned the low yields point because certain regulars who I like/respect do point to it, but it clearly doesn’t explain the whole picture alone.
By their same logic the FTSE 100 should not be around 7,000, but probably over 30,000.
Similarly I did a discounted cash flow on Diageo the other day assuming very low yields persisted (for fun! I would not suggest this is sensible), and I got a fair value of over £120 a share! It is currently around £20.
So the ‘low yields justify any insane price-to-earnings multiple’ argument doesn’t cut ice with me. 🙂
@Neverland — Fair comment, but I have friends now who have paid off their mortgages. Yes, they started when house prices were cheap, but they ‘held’ when prices first started looking irrational and beyond…
@Moggers — I swear this is true, I wrote a reply to your first comment the other day saying something along the lines of “you appear to be my long lost sibling!” But then I deleted it because it was the sort of short and quippy comment I don’t find constructive from others, and I hadn’t got time to waffle it up into size.
(The difference between us is “I wouldn’t change a thing”. I would rather have bought and learned these lessons more cheaply, perhaps with some expensive growth share. 🙂 )
Interesting post as always. I’ve known a number of people prevaricate for years over buying property because they fear it will fall in value. Doesn’t make sense to me. If they see it as a home, then the important thing is whether they can afford the mortgage and could cope with interest rates normalizing. If its seen also as an investment, then over 20 years it will probably increase in value. Timing the market is considered unwise in any other areas, so i dont see property purchases as any different.
I have been recently in argument with a London based landlord.
My point was that selling his property and investing the proceeds would yield him much more than his current tenant plus future capital gains.
So his yield is now like 3% plus he hopes prices will be growing in future 🙂
He pays tax on this obviously.
What i was telling him that he could invest in diversified portfolio with higher overall yield within 5-10 years, AND he could save on taxes as this – 5k +5K tax free divs for him and his wife, 11k +11K are tax free capital gains, which gives him 30k+ yearly income tax free..
Unfortunately, he was not willing to take risks he perceived as high there..
Surprising, how many such folks are out there…
@The Investor Haha – yes, I’ll agree that the tuition fees for this knowledge have been very high indeed if one compares them to the cost of buying in to the housing market now.
So we are who we are because we made the decisions we made. Had I bought, I wouldn’t have traveled the world at £1 gbp = $2.05/¥250/€1.5 in 2007, and the experiences that bought. Very lucky I was indeed.
By our saving and investing – and with one eye always on comparing it to house price inflation, we’ve really lived something very interesting first hand.
The similarities extend to our 90s experiences – you with your mates, and me a precocious mid teen who told my dad when we were moving in 1994 to keep the old house. Not for letting out – being a rentier has never gelled with my ethics but because I thought it would be a good thing to have ready for me or my sibling when we finished education.
He had that option, or to buy the place we were moving to outright with savings + the other sale – the other thing I told him to do. The right answer, with hindsight was to keep the previous place, and buy the biggest place possible with a mortgage, and invest the rest in msft and aapl. He just lived as he always did – simply. We sold up and bought the least house necessary with a small mortgage and kept the savings as a rainy day fund.
Anyway, fast forward 22 years. The assets we have came from saving, deferring gratification, some luck, some skill and hard work and hustling to improve our earning power. Although people who have bought undoubtedly have worked to get where they are – and i dont begrudge them it for a moment…no one can deny large swathes of their net worth comes from the ‘magic’ from housing inflation.
And it becomes nigh on impossible for me at least not to have a wry smile at the system we live, and turn my back on it. At this point, handing over those hard worked and earned fruits to someone who got it – not exclusively but in the average case – in large part by virtue of age, excessive risk (liar loans) or simply just going with the flow and living in blissful ignorance to what’s going on isnt going to fly. I just couldn’t live with myself.
Tl;Dr Your pragmatism is admirable having lived a similar life!
@Surreyboy – exactly my thoughts. Why do people try and time the market when buying a home. I suppose the big difference between buying a home is
1) leaveage so more to lose
2) being forced to sell in down market (like having to move for work and not being able to rent it out)
3) psycological impact esp if you are putting a large chunk of net worth into a house
4) possibly the biggest in my view – getting stuck in that starter flat for 10 years while wanting to start a family. Arguably sky high prices do this as well
Most of this can be mitigated if you are sensible and don’t buy more house than you can afford in fact don’t buy more house than you could pay off if you really tried in 10 years. The beauty of a down market is the next house move becomes that much more affordable so just make sure you don’t end up at the limit of your income paying the mortgage.
@SurreyBoy
“Timing the market is considered unwise in any other areas, so i dont see property purchases as any different.”
Except you can’t buy 0.3% of an average basket of houses every month for 30 years
You just buy one house once and then pay if off over 30 years
Your problem if you make a bad deal
http://ny.curbed.com/2016/11/18/13679646/susan-soros-weber-townhouse-ues-sold#0
@Richard, all good points. I guess i look at it and think those risks are always going to be there. Unless you had the remarkable good fortune to have watched prices fall 30% and be confident the market had reached bottom etc.
@Neverland, i know what you are saying and no property should be purchased without weighing up a whole load of risks, but i still think if someone wants a home and can afford it they risk waiting forever for “the right time”.
That is the point around ensuring your mortgage is managable. Timing the market is much more important if you are going to be putting 60% of your disposable income into the property every month as a drop is likely to be very painful and very expensive and leave you stuck somewhere. If you are putting in 15% every month then excepting becoming long term unemployed you can easily suck up a loss, take advantage of the low prices or enjoy the gains if the crash never comes. So try and time the market if you are going to be up to your eyeballs in debt (stupid). Don’t bother if the house is going to be cheap relative to income and you still have the cash to exploit other opportunities (smart). Otherwsie you end up paralysed with fear and never buy. Or just take the rent forever approach but then don’t moan about house prices preventing you from buying.
Of course ideally get a property you don’t have to move from, as the costs of moving can be substantial.
@surreyboy ‘Timing the market being unwise’ is one of those other statements that might apply to some people – but not others.
In the main, I agree – don’t try and be too clever, but also, I’m more to at least try to time every purchase i make – whether it’s waiting until mid January this year and hoovering up RDSB, FQM and BLT at decade lows (what a heady time), and then flogging my stakes off 6 months later and keeping the free shares, or waiting till 3.45 tomorrow afternoon and picking whatever been heavily reduced in tesco for my evening meal – and i include a house in that.
Sometimes it goes right, sometimes it goes wrong. But at least it usually involved some research and thought. And as @neverland said, you can’t drip feed your money into a house. Your purchase price is fixed. Great in times of high salary inflation, not so good when you’re having to play catch up and ‘please sir can I have some more, the people ratio makes no sense’ doesn’t work on the boss.
So, Castro’s dead, huh? What a year…
Anyhow, I find it interesting how losing money in the financial markets can leave one feeling guilty, but it’s different with property. I recon that must be because there’s no exchange to display a live market price of your house. Save for the circumstances which Ermine refers to, when you pretty much can’t escape the news of your house having lost value, a smaller downturn in property values is easy to ignore due to a lack of reliable information.
I’m probably unusual here, as I bought a flat aged 22 (in 1990), upgraded to a house in 1997, then sold it in 2003 and haven’t owned once since. I thought the 2003 price was too high, but I sold it to have a year traveling the world, and then find my next (extremely specialist) job and buy nearby. Only I never found that ideal job, and alternated spells with my parents with renting while servicing contracts in the UK and abroad, and traveling again. So in 13 years I paid 4 years rent and have switched from being a burden on my parents to being my Mum’s carer. At all times I could have afforded to buy a house, perhaps as BtL, but didn’t (I made an offer in 2010 but pulled out). I just didn’t want a house that wasn’t my home.
So I rode the bubble for 13 years and gained ground, but being out of the market I still gained ground, even using building society accounts for safety for 9 years, then stock market since, as I’ve just not had much housing expense. Now I’m due to inherit a outer London house, so I’m protected from the market, but I have no desire to enter it as an investment. As others have said, we eschew market timing for equity, but leap in for property with such limited exit options, its just not appealing to me.
Perhaps you might do better to view housing as a choice about where and in what you live, rather than the money. Outside the capital the choice of renting would not be attractive to most, either for quality or stability unless you are in an area for a short time. London is a special case because prices are very very high
Bought my first house in Slough in 1983, decided I wasn’t happy renting after a succession of 6 month or so shares and so asked a mate if he wanted to go halves on a house, bought it the same day for 32k (3 bed almost new semi) 100% mortgage. Had a new opportunity open up 6 months later, flogged it for 39k, took my mate down the road and showed him our buyers flat for sale and suggested he buy it and invite his girlfriend of the moment to move in and have some fun, everybody was happy…
And so if you buy a house that appeals to most people and is in the right place then I have found houses are pretty liquid over the years….
The positive aspects of where I choose to live (generally location specific, rather than size or bragging rights) have made it a winner and the money side has taken care of itself, not the other way round.
“to keep the old house. Not for letting out – being a rentier has never gelled with my ethics but because I thought it would be a good thing to have ready for me or my sibling when we finished education”: so, on purportedly ethical grounds, you would rather have left a house standing empty than have let it. You can’t mean that. (P.S. do look up what “rentier” means. The word you seek is ‘landlord’.)
That chart is rainbow in colour, and in shape. 8x ratio is high, 14x is very high.. it is hard to imagine that ratio increasing much further, certainly not 20x or 30x. So will prices decrease or incomes increase? The latter seems unlikely.
@The Investor
Well you are basically avoiding Buffett’s Folly by circumstances! Good situation to be in!
I’m glad you mentioned that bond bubble. It is worth remembering that there are a lot of moonshots – particularly once leverage is added, I certainly feel they come along often enough. The problem is that UK residential property is the only moonshot that is directly visible to the masses.
As an example, if someone had bought long term GILTS (50+ years to maturity) with a £150K deposit and a £850K margin loan through Interactive Brokers in 2013 (no income required to get that magical £850K margin loan by the way) when those long dated GILTS were being issued, then sold in late August 2016 after prices had been continally bid up by Quantitative Easing (QE) and doubled, they would have cleared £1M in profit after tax (a London house on steriods, without the hassle of property ownership and then some). For Qualifying Corporate Bonds (QCBs) – which GILTS are – the capital appreciation is completely tax free. The coupons on the GILTS would (probably, I haven’t run the numbers) have cleared the interest on the margin loan (even after paying income tax). That £1M tax free gain would largely have come directly from taxpayers in the form of QE bidding up the prices as well (so it is nearly 50 times the net salary of the average earner on £26,500 in the UK).
It would have worked at smaller levels for the ‘first time buyer’. A £15K deposit and £85K margin loan would have cleared roughly £100K in profit after tax.
So all I am trying to say is that the ways and means that made some people fantastically rich from property with mortgages do exsit elsewhere, for other asset classes. Sure, those asset classes don’t have politicians bending over backwards to support the price of the assets in the same way and typically, other asset classes are more volatile with shorter cycles than property, but they do exist.
But this example also contains a cautionary warning. If you had bought the same GILTS in late August 2016 using a margin loan, prices are now some 20%+ lower, which would have led to forced selling through margin calls and likely seen the £50K deposit money wiped out completely – the parallel in the residential housing world of negative equity and being a mortgage prisoner.
So much for GILTS being risk free assets!
I know it isn’t the same, as you are forced to rent or own a property – so no-one can abstain from this circus we are forced to participate in.
All of this just reinforces my view that salaried employment these days is what is required to get the seed capital for an investment snowball. It’s the investment snowball that is going to see you do well, it has absolutely nothing to do with working hard or doing the right thing, or making a contribution (or any other soundbite the politicians might like to throw about).
If taxes on salaried employment were lower and taxes on investment income and gains higher, I might take a different view, but when the former is taxed at 40%+ for everyone (once Employee NI, Employer NI and Income Tax are in the mix) and the taxes on investment income and gains are close to zero (through tax wrappers, use of allowances and that principle primary residence, with non-dom status thrown in for some) then that tells you precisely how you need to play your ‘game of life’ in the UK.
@dearieme – I should have added ‘not for letting out indefinitely’. It would probably have been rented temporarily. Anyway, I was about 15 at the time and the housing situation was very different to today – give me a break. At the very least, I recognised after the 89-94 crash that the house was relatively inexpensive (it went for 35k vs 65k it would have in 89), so was probably worth holding on to.
And Rentier/Landlord – tomato/tomato. Its probably wise not to correct me on that one because i have plenty of rather more inflammatory synonyms about borrow to let landlords in these times I would just love to have used instead.
Thanks for the mention TI. That rainbow chart is taking on a life of its own. I expect to see it in the next Bank of England inflation report at this rate!
As for your missed buying opportunity in 1995 (and 96/97 etc.), I wouldn’t worry about it. I’m sure you (like everyone else) have made far bigger blunders in your life, most of which you aren’t even aware of!
Top of my list is not picking the winning lottery numbers last week…
@JonWB
One of the well known U.K. personal finance bloggers did exactly what you are talking about
But if you look at how he accumulated his c.£1m very little of it came from investment returns most of it is just savings
There are 100s of posts on investment strategy in RITs blog – all quite technical – but he still saw no snowball
However if he had just bought a house in London with a big loan a decade ago it would have doubled
My point is that whether you get any decent returns on investment over even a twenty year window is a rough combination of:
– starting price
– luck
The starting price for U.K. residential property is high
@Moggers: “tomato/tomato”. I prefer to own up when I make mistake, but if you’d rather be unmanly about it, so be it.
Ok, apologies for my mistake. perhaps I should have put that ‘as a 15 year old, I’d rather i had not been seduced down the slippery path towards rentierism’.
Minor type: “Millenials”. Needs a double N.
We only ever bought two houses and managed to buy at “green times” in your chart in 1987 and 1994. While we’ve seen massive house price growth over the years, we’ve also seen major crashes and widespread misery, so we’ve always been (too!) cautious on gearing and exposure to the property market.
We’ve been lucky enough to be mortgage free for the majority of time and so have been able to bang a lot of money into investments. In retrospect, we’d have kept first house and rented it out, and perhaps not paid off mortgages so quickly, but I have zero regrets TBH.
By golly, it’s cold today isn’t it?
@The Investor – “.. they’re too busy going on holiday with all the money they save from paying £200 a month for a four-bed house.” –> An exaggeration in part, or a truth? I suspect the latter.
Anyway.
Plenty have made a lot of money out of property purchases, with no respect for the risks they were taking. No respect at all, dammit. And that can be a hard thing to stomach, especially when you’ve come up with a considered argument and been on the ‘wrong’ side.
Those be some lovely graphs.
Funny, looking at the second graph. The crash in house prices in 2008/09, for London, looks comical compared to the increases after.
Been looking at moving house for a little while now…at first the prices seemed almost farcical. But pummel your fragile mind with them for long enough, and soon the prices become normal. You remember prices being £1,000’s lower only months ago. Places get snapped up in an instant, or go to a blind auction at get bidded up to heavenly valuations. I got myself out, before I was swept away in the property flash-flood and ended up with a derelict 2-bedroom terrace with an outside loo for £400k.
Mr Z
A very interesting article on the unwinding of the pound carry trade, one to think on http://voxeu.org/article/unwinding-pound-carry-trade
“The crash in house prices in 2008/09, for London, looks comical compared to the increases after.”
Indeed – housing costs have been cyclical but only in the first derivative. It just can’t continue for much longer though; you run into limiting factors like uh the human lifespan (increasing slowly) / working time (decreasing not so slowly). 60 year mortgages anyone?
@Learner
Ugh, 60 year mortgage.
“Daughter/Son, I know you are only 1 and not able to understand me, yet. But I thought you should know I signed a 90 year mortgage in both of our names today. Hopefully you can pay it off before you perish. You’ll thank me…someday” – Keith of the Future, 2025
“And that can be a hard thing to stomach, especially when you’ve come up with a considered argument and been on the ‘wrong’ side.”
Reminds me of the quote “better to be lucky than good”
400k for a 2 bed hovel? I thought you lived in Wiltshire?
The thing that worries me is looking at charts like this in 10 years time and saying, I wish I had bought because 2016 prices were so reasonable compared to today. This money is coming from somewhere, any signs that it is drying up?
@Richard
Look at the charts: house prices in Glasgow and Leeds are still lower than they were a decade ago
There is no magic sauce that means house prices will always go up
I have sympathy for TI since I’ve played my hand terribly in London property. I came to London in 1998 but didn’t buy until In 2002. A modest 2 bed flat in zone3/4 for £350k. I put down a 70k deposit, my salary was £90k, so it was around 3 times salary (though 10x salary). Their tolerance for leverage was huge. Some of that was higher confidence in their earning ability, mostly it was having an inheritance to bail them out if it went wrong. Either way they won and I lost. Worse I compounded the error by paying off my mortgage two years later, rather than upsizing. It wasn’t until I had children (2010) that I upsized to a family home. Even then I failed again and bought cash. Repeatedly making the same error: seeing a house as a place to live when actually the correct way to view it is a leveraged tax-free investment.
I was starting to feel pretty negative on London property in early 2016 (stamp duty, taxes on overseas buying, lower compensation in financial services etc). Brexit has changed that. Those in financial services are sitting here on huge gains from their unvested bank stocks. Someone at say JPMorgan has seen their unvested stock rise 40% YTD in GBP terms. When that vests in 1Q17, I suspect they will go on a house buying spree. I’ve always found it interesting that those in financial services rarely invest in stocks or bonds; they just buy bloody big houses!
@ZX – so if you’d kept a 100% mortgage on the go over the timeframe, trading up bigger as soon as you could afford the repayments, how much further do you think you would be ahead? Possibly several mill maybe?
@Moggers @dearieme
Rentier is a marxist term for living off of unearned income. Being against living off investment income is not particular compatible with a blog dedicated to investing, financial independence and early retirement. A bit of cognitive dissonance perhaps?
Whatever people think about the tax breaks associated with property, there is nothing immoral about taking advantage of tax breaks, even if you are politically opposed to them. Tax breaks for pensions and ISAs are in a similar class as buy-to-let tax breaks.
Personally I’d be happy if all income was treated the same no matter what the source, with a flat unambiguous tax rate to boot. Capital gains is simply income for taking a risk in buying and selling assets. Dividends are income for taking the risk that assets will generate profits. Salary is income for taking the risk in developing skills and trading them. All income requires reward for risk.
When we start demonising certain ways of earning, there be dragons.
Your early situation mirrors mine uncannily. I remember reading the same article about how affordable houses were and how cheap it was to rent. It was true. I had friends living in rented apartments on the South Bank near Tower Bridge for next to nothing because they were not selling. They must be worth millions now.
I also tried to buy but was also too picky about area – I wanted to live near where I grew up in north London but it was just too pricey for me. I then lost my job and drifted for a while and of course in the meantime prices kept running away from me. However in the early 2000s my mother died and my father wanted shot of the family house. He very generously gave me part of the proceeds which allowed me to buy. So I am a classic beneficiary of having a parent who was willing and able to recycle a house price windfall to the next generation.
I felt that prices were very high then and didn’t expect that it was possible they could go up much higher. I still don’t understand how they are so high. I suspect it is because the volume of sales is way off what it used to be so it is not really a particularly liquid market and a few very wealthy people who are still able to afford these prices keep the show on the road. A lot of people probably try and sell but don’t find a buyer so they just let the house sit on the market or withdraw it if they don’t get the price they want as they are not forced sellers. It suggests that you view that prices are vulnerable is correct. However on the other hand there are so many people with money in parts of the world with arbitrary government (Russia, China, even parts of the Eurozone for example) that there always seems to be enough people willing to invest in London.
@neverland – true, but I have had people tell me that for the last 10 years and some places (like the SE) show no signs of reversing yet (though agree it does feel somewhat fragile). I just wonder if there will be another 10 years of people saying it and it not happening…..
@zxs – one thing you had is security. With no big morgatage payments you can sit back and enjoy / invest your impressive income and not really have to worry about losing your job or even your investments. Unlike the person with £1m morgatage to pay. You never know, it may add years to your life not stressing and time is something you can’t buy at the end.
@Neverland – Looking at RITs post (http://www.retirementinvestingtoday.com/2016/11/wheres-snowball-why-youd-better-save-if.html), I am in the fortunate position of living through nearly that exact experiment, only starting in 2006, where it turned out very well. In my case:
1) Saving at a bit of a lower family savings rate than TheRIT in the example (albeit at a higher absolute amount)
AND
2) Achieving more than double the returns of MissInvestingSuperstar
AND
3) Starting off with approximately £50K seed investment (albeit in 2006, rather than 2007) – this was just savings from first 8 years of employment, nearly all of that was just sat in current accounts (so about 8 years worth of lost ISA subscriptions).
I did buy a family house with my wife in 2006 in the South East, at 85% LTV, then switched to interest only in 2010 – to free up more money to subscribe to tax wrappers.
I then thought I would look back and see what would have happened if I didn’t use tax wrappers and instead went for investment on margin outside tax wrappers and just paid the tax as it fell due. Whilst the records (and access to and costs of margin) are not good enough for any academic submission, ancedotally from 2006 -> 2009, in my case, I am pretty sure I would have gone bankrupt, completely blown out of the water by the financial crisis. However, if I had switched to investing outside tax wrappers using margin from 2009 onwards, I would have hit more than a moonshot relative to the tax wrappers – even with the tax burden (although it is always tricky to value money outside a tax wrapper versus money in one, due to the tax free compounding).
I think my house probably got down reasonably close to my purchase price around 2009/10 (I wasn’t really paying attention, as it didn’t matter to me at the time), but I was safely covered on the mortgage as we went for a reasonably low earnings multiple in 2006 and a long term fix at the time – the irony being that I thought the only thing that could screw us was interest rates spiking!
Currently in London for a few days. Today I walked past one of the plethora of letting agents and noticed a 100msq flat (aka ‘apartment’) to let for the sum of £6,000p/w. That’s per WEEK. Seven days. £364,000 per annum. At a perfectly reasonable cap rate of 6 that values the property at £6,066,666.6666666 (sinister?). Although we all know that cap rate is pie in the sky.
@The Investor
Going back to this comment you made a few days ago:
“Anyway, I just mentioned the low yields point because certain regulars who I like/respect do point to it, but it clearly doesn’t explain the whole picture alone.
By their same logic the FTSE 100 should not be around 7,000, but probably over 30,000.
Similarly I did a discounted cash flow on Diageo the other day assuming very low yields persisted (for fun! I would not suggest this is sensible), and I got a fair value of over £120 a share! It is currently around £20.
So the ‘low yields justify any insane price-to-earnings multiple’ argument doesn’t cut ice with me.”
(SouthernComfort again now:)
I realise it sounds very back-of-the-envelope, but I’d love to see an example of the Diageo or FTSE vs property calculations. As an investor choosing between shares or (potentially) property, it’s a very interesting question which is more expensive. It certainly sometimes feels like the one thing driving everything is insanely low interest rates, and the market is basically pricing the devaluation of cash From a relative value perspective, it’s a pretty key question how much this is reflected in different markets.
Of course as your second chart reminds us, UK property is far from homogeneous. I assume you used some stupidly-priced obscenity at the top end of the London market rather than a two bed flat in Leeds for your implied interest rates.
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On a separate point to my previous comment, I should I have some concern about the use of the rainbow bands in the first chart. For me it implies the yellow band of PE 3.8-4.5 as “fair value”, with the bands around it representing over- or under-valuation with an expectation of return to fair value. This can only be an assumption though. I don’t want to go too easily into “this time it’s different”, but there is at least a possibility that conditions have changed and the historical PE from a few decades ago is no longer the best guide to valuation today.
I’m reminded of Shiller’s CAPE measure for shares. The S&P’s ratio has been above the long-term median since the late 80s, apart from a brief moment around 2008/2009. That’s over 30 years, going back to well before I was old enough to invest. Is the historical median still a good measure of value? I don’t know – but I can say that if you were using it as a valuation guide, you’d have been out of the market for an awfully long time.
By the way my own view on London property is quite similar to The Investor’s. It is clearly showing bubble characteristics, and may well be one of the most overpriced assets globally. However I’ve been predicting a fall for about 12 years, in the face of sillier and sillier prices. Now I’ve pretty much thrown in the towel. I no longer predict catastrophic falls. These may well come, but I’d limit myself to saying that from an investment perspective I’d rather have my money in almost anything else (Midlands or North of England property, or shares of course)… a statement of relative value rather than absolute value.
An alternative view to the rainbow chart is this first time buyer affordability chart:
https://twitter.com/resi_analyst/status/798476287585243136
This suggests that the historically low interest rates allow even the high valuations currently seen to be relatively affordable.
As much as it pains me to say it TI (for I would love the property market to fall) these graphs of P/E that you and others post from time to time completely miss the point.
Ultimately just two things control the cost of housing:
1. Cost of construction – not a factor in the U.K, demand far outstrips supply and our planning system is archaic.
2. Interest Rates – Ultimately property in a supply constrained environment is a fixed income asset. Some simple calculations show that the monthly cost of a £100k mortgage at 5.5% for 25 years equivalent to a £145k mortgage at 3% for 30 years. Post 2008 this is the new normal, people work longer and long term interest rates are several percentage points lower.
Therefore the yellow band, 3.8-4.5x earnings pre financial crisis is equivalent to 5.5-6.5x now. We’d need prices up around 8x earnings to be truly bubbly.
Thanks for all the further comments! I can’t respond to all, so just briefly I do appreciate interest rates and therefore affordability is a factor, of course. Like any renter I’ve done the maths and sobbed a bit afterwards — even as prices have moved into the stratosphere.
However comparing low initial affordability with higher payments in the past misses out the impact of inflation. In the past, your debt (and real cost of payments) were quickly eroded by inflation. That hasn’t happened for years.
See this excellent article, which is the source for the useful Twitter graph pointed to by @puj above:
http://pdf.savills.com/documents/2015_02_27_First_Time_Buyer_Affordability.pdf
The report’s author concludes (my bold):
True, they’re not saying the market will crash. (And nor am I, as conceded I’m too hard-bitten for such predictions these days. I am just saying London property is insanely expensive. Who knows what happens next for sure.)
Interest rates being low would be a more convincing argument if it meant that interest rates will now always stay low.
But of course we do know that interest rates can rise and fall. Thus when @Propertyless_Youngster writes:
It’s a fair point, except it’s missing a vital “or”. Prices need to rise OR interest rates need to rise.
With prices already at an all-time high (by far) against earnings and interest rates still around 5,000-year lows, which is more likely?
But then again, as I say I’ve thought that for years. (I’d also throw employment into the mix. Remember UK employment is at an all-time high, too).
Finally — and to eat more humble pie — we did have a commentator earlier up the thread comparing the foolishness off his/her landlord to their own savvy readings of the market, despite my veteran warnings against such boldness.
To which person I say good luck to you, really, good luck. I think the odds of you being right now are better than ever.
But understand some of us in London have been making that same argument — and the data seemed to be there to “prove” it — for many years. Ultimately capital appreciation is always the big unknown, and it can bail out these arguments.
See (hugely embarrassingly) this post:
http://monevator.com/how-buying-in-west-london-will-cost-you-thousands-a-year-more-than-renting/
I was totally wrong, and my landlord has probably made another £250,000 while I’ve been renting his property for nearly a decade.
What a situation. Pah. And what to do next? One can only think of the old Irish joke on asking a passing traveler how to get to wherever: “Well, you wouldn’t want to start from here.”
With most things in life, as you get wealthier you get to a point where you can buy somewhat modestly and not care if you’re wrong about the price. As others have said, you can be wrong about a share. Even a stock market for a bit, if you invest regularly.
With a near seven-figure London property it’s harder to be so sanguine.
I may eventually buy a “cheap” £450,000 one-bedroom flat just to numb the pain and throw away the Blu tack, and then move up after the inevitable crash that will follow this last bear throwing in the towel. I’m loathe to buy anything even semi-temporary that costs a lot more, given the transaction costs.
But then, I love the countryside. I may eventually move there. Or if Brexit is a canary in the coal mine maybe I’ll leave altogether for the Med or beyond. An option, albeit one I took for granted as a trivial and valuable right we all had before the Referendum.
My mistake was to fall in love (and hate!) with London and to still have most of my friends here. I’ve not needed to live here for work for a long time now.
The link from @Underscored above is provocative if you’re curious for more perspectives on the London price appreciation, by the way.
@TI: the real problem is that in the U.K. a buyer can not lock in these low levels of interest rates, unlike say in the US or Europe. The interbank markets suggest that even to a retail investor a 30y fixed mortgage (if such a product existed) should be 3-3.5%, and as I argued above at those rates there is still plenty of upward room for the market. that aside, these could be famous last words but who realistically expects rates to be above 3% in the U.K. in the next 10 years, there will have to be one almighty boom first, the government has shown time and time again it will tolerate high inflation to help out indebted householders (and governments!)
I feel a bit embarrassed here to admit that we’ve done very well out of the London house market having got on the ladder early but I think the article and comments are missing a few factors:
Whatever nonsense the government are doing, people like the UK and they like London. When we let out our London house four years ago as stage 1 of moving to the country (@Investor – I’d recommend it!) our tenants were South Africans. Our local newsagents had adverts for rooms in both Afrikaans and Polish – it wasn’t just British people pushing up prices…
Yes, prices are high but I know a lot of people that are still trying to get onto the ladder. If the market ‘corrected’ by 10% or so I think there would be a huge amount of buying that would ultimately bring it back to the same level pretty quickly.
Prices are still reasonable in other parts of the country and a fraction of London values. With remote working and decent transport links it’s quite possible to have your cake and eat it: near us in the SW there are three bedroom houses in a decent and reasonably central city location available for £200-250k.