Good reads from around the Web.

Bank of England governor Mark Carney was once described as behaving like an unreliable boyfriend with his mixed signals over interest rates.

By that measure, chancellor George Osborne is the housing market’s noncommittal adulterer.

Not long ago George was puffing it up with gestures like First Buy and Help to Buy.

Then came his emotional decision to sugarcoat the case for hoarding the biggest home you possibly can with his changes to inheritance tax.

Nor should we forget the right-to-buy extension for Housing Association tenants – announced amid the steepest housing crisis for generations – which seems designed solely to shore up this administration’s Thatcherite credentials.

Or what about the Help to Buy ISA, which launches this week? A sweet nothing if you’re looking to buy in London, but useful elsewhere and a political carrot at last for those who dare to be aged under 60.

Toying with our affections

Like any good Tory, Osborne seemed in love with a strong housing market.

But more recently he looks to be getting cold feet – and at least sounding like he understands that ever-higher house prices aren’t necessarily a commitment he wants to sign up to.

Osborne revamped stamp duty in December 2014, and in doing so he took some of the steam out of prime London property.

And in July the second of this year’s procession of Budgets surprised us all with overdue changes to tax relief for buy-to-let landlords.

But if the housing market were a person, it was on hearing this week’s Autumn Statement that it might just have snapped it – a hastily packed suitcase bursting open at the door, and the embattled lover collapsing amid their underwear and travel-sized Apple hardware sobbing: “Just tell me what you want.”

Because the Statement saw the Chancellor mix his messages in the very same message!

The following graph illustrates the confusion. It shows the share price of housing giant Berkeley Group from Tuesday afternoon until Thursday morning – with Wednesday clearly being the fireworks:

• At first the share price soared on Wednesday after early briefings that Osborne was going to ramp up home building with billions of pounds worth of taxpayers’ money, which he duly went on to announce.

• Osborne even revealed that home buyers in the capital would be granted access to a new jumbo-sized London Help to Buy scheme, worth up to 40% of a new build property’s value. Happy days for housebuilders!

• But then, just after 1.30pm, the share price plunged, when the Chancellor added that – oh, by the way – he was also going to increase stamp duty on buy-to-let purchases by a flat 3%.

Now don’t get me wrong, I think it all adds up to Osborne’s most coherent attempt yet at getting at the core problems of the UK housing market – the under-supply of new houses, and over-investment by landlords at the expense of what’s supposed to be a home-owning democracy.

This table from The Guardian shows how the 3% stamp duty add-on will increase landlord’s costs significantly:

Source: The Guardian

The cunning of the flat 3% hike is clear; it increases buy-to-let buying costs disproportionately at the lower end, where the first time voters buyers are found.

Together with those changes to Landlord’s tax relief announced in the summer, it could be a game changer for the dominance of buy-to-letters in the market.

The end of the affair

As I wrote in my article on fixing the property market, it’s not that buy-to-let is inherently wrong.

Rather we have a housing shortage in the UK and landlord growth has come at the expense of first-time buying.

Given that most of us want to own our own homes, even if we’re personally sitting pretty it makes sense to re-tilt the playing field back in favour of those who could buy in previous decades – and who theoretically can now – but who find themselves squeezed out by deep-pocketed, cashflow-insensitive landlords.

Some say these changes are unfair because they will penalize independent landlords, but not larger incorporated operations who can sidestep the extra charges.

However I’m not convinced that matters from the perspective of curbing house price growth and enabling more people to buy their own homes.

I suspect professional operations are also less insensitive to falling yields and less inclined just to bank on future price appreciation – two issues with the buy-to-let sector (in the South East, anyway) that is arguably even making it a threat to economic stability.

Others complain that making buy-to-let less attractive is just the latest example of the older generation pulling up the drawbridge after making off with the profits.

The Telegraph – already angry about the tax relief tweaks – noted:

One in three Tory MPs own buy-to-lets – but they’ve wrecked it for everyone else.

With the stamp duty increase and withdrawal of tax relief, the Tories have ‘killed buy-to-let for the middle-classes’.

Rarely has the esprit de Telegraph been so transparent as it now is over property.

The paper seemingly wants a readership of buy-to-let landlords who can pass on their property wealth via big inheritance tax breaks to enable their own kids to buy their own homes, while everyone outside of the land-owning circle rents and lives on the whims of their landlords.

Because the Medieval Times were such a blast, right?

Home is where the heart is

The extra housing Osborne claims he’s going to get built could help arrest the endless march higher in prices, too, provided they’re built in London and the South East.

There are certainly reasons to be skeptical of any immediate acceleration – planning restrictions and rising labour costs for starters – but this is the biggest declaration of intent yet by the Government to get things moving.

Of course, it wouldn’t be a political love affair without some short-term silliness – those mixed messages don’t just mix themselves.

In particular the London Help to Buy scheme looks like oil loaded into a crop duster ready to be sprayed liberally over Zone 3, helping prices grow still higher.

In addition, the four-month delay before the 3% additional duty kicks in could lead to a “ballistic” rally before April, according to one mortgage broker.

Perhaps the idea is all this will offset the landlord money that eventually leaves the sector, keeping prices stable?

Perhaps. Anything is possible in the world of barmy London property these days.

Indeed, this fantasy world aspect to housing in the South East is I think Osborne’s biggest problem.

It’s why he continually finds himself going around in circles to keep the show on the road, while more recently making some effort not to disenfranchise the entire younger generation in doing so.

Make up or break up

If you went back in a time machine even 20 years and tried to explain today’s economic situation – homes costing up to 12 times average salaries (compared to 3-4 times in the old days), interest rates near 0%, and amateur landlords buying London apartments on 2% yields – your listener would assume the UK had turned into a futuristic dystopia.

Someone will probably tell us in the comments below that it has.

But what’s more surprising is that it hasn’t.

Employment is at an all-time high, the economy is growing, the national finances are at last on a path to sustainability (albeit a slow one), and those short-term damaging tax credit changes were diverted.

All this is threatened, however, by the timebomb that is the housing market.

If Osborne looks like a figure in a love triangle desperately trying to engineer a bit more time, that’s because it’s exactly what he is.

If he can achieve a decade of stagnant prices, he might just see off a slump.

A boom without a bust?

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There was no point ducking it – I was earning 20% less than the year before, but I felt like I working as much as I always had.

It was a sobering realisation.

It was 2008 and the recession had been taking away my clients for months.

Most of us get used to a rising income over our working lives – unless interrupted by illness, a career break, or children.

Yet my gravy train had careened into the sidings.

I was also out of practice in drumming up new work.

Something had to be done.

How boosting my earnings began with a change in mindset

Reducing your income through early retirement or downsizing can be a positive step forward.

Seeing your long-term plans derailed by the whims of the economy is different.

I had no desire to get philosophical about my newfound role in Honey, I Shrunk My Salary (And Put Financial Freedom On Hold).

So I considered my options.

For a while I thought it might be time to change the focus of my work (and a few years later this proved to be the case) but before then I was able to arrest and then reverse my declining earnings by shaking up how I thought about my output.

In this post I’ll explain how just an hour’s effort might put your income back on track, too.

It’s a motivational technique that probably works best if you’re self-employed, or if you have a side business on the go (and you should!)

However I believe it could also be used by those in full-time employment, too.

Greener grass syndrome

Before I share my technique, I’ll describe how it came about.

I’d lost two clients within two weeks of each other.

Wondering when it would stop, I pondered the unthinkable – giving up freelance and getting a job!

I had some useful skills that I knew could land me a permanent role somewhere, despite the downturn.

In fact I had friends at one company I’d already worked for that had a vacancy I was confident of filling.

But going back to full-time employment would be a drastic step.

Being self-employed suited me, and I’d done it on-and-off for over a decade.

True, my career progression had flat-lined.

But the positives of far more freedom both in my personal life and how I worked outweighed for me the fact I wasn’t now bossing people around for a living.

Yet I was concerned.

Who knew how long the recession would last?

Perhaps I’d only been able to make a good living as a freelancer because of boom times that had turned to bust?

Meanwhile, here was this job offering reasonably interesting work, a decent salary, a four-day workweek (!), and paid holidays. (The latter something full-time employees always take for granted).

It even included a then-newfangled iPhone on contract.

As I was pondering the downsides – a boss, commuting, office politics – it struck me that the salary on offer was actually below what I still expected to earn that year, even assuming my lost clients weren’t immediately replaced.

In other words, I was being scared into swapping uncertainty about the future for the certain downside of crystalising the very loss of earnings that I feared!

I did it my way

Why was this potential job so appealing?

Thinking about it, I realised I’d been drawn to the security and perks of a role…

…all spelled out in clear type.

I saw I’d become very uncertain about what I was trying to achieve from self-employment.

For many years I’d had all the work I wanted to do, and I’d grown complacent about my motivation.

Could spelling out my freelance rewards and responsibilities address this, I wondered?

Yes, was the answer. Better than I could have expected.

Here’s how I did it.

I wrote my own job description

I decided to do write myself a contract of employment – all in the third-person – as if I was an official employer.

It was the sort of job offer I wrote for potential candidates when I headed up my own start-up company.

The big ticket items like the salary and specific role were at the top, and then came a clear list of what I was expected to do to earn my money.

I also stated:

• My hours (I prefer to work six days a week but only from 8.30am to 2.30pm for maximum productivity).

• The average on-target day rate I needed to earn to keep my job.

• My non-core responsibilities (including prospecting for new clients…)

• A set holiday allowance.

• Flexi-time possibilities to ensure I work away from home for at least two weeks of the year — a perk too often lost in the bustle.

• I decided as a bonus that my job would also come with an iPhone!

There was lots of detail specific to my own business, too.

When you formally employ yourself, my advice is to get your job description as detailed as you can.

For example, include lunch hours and working conditions.

It felt a bit stupid when I was spelling that out, but once I had it all written down I would refer to it several times a week — and I slacked off less.

I don’t mean I stopped taking afternoons off or whatnot – more that I stopped perambulating around the Net when I was meant to be working, being happy if I made some money instead of enough money, procrastinating, and avoiding frogs.

Tackling mental beliefs is important if you find yourself ‘stuck’ at some particular level of income, but for me it turned out to be equally useful for simply holding the line, too.

My income went up, almost automatically, as I relentlessly focused on what I was looking to achieve, instead of wondering about what I wasn’t.

What if you’ve already got a full-time job?

Perhaps this post isn’t as relevant if you’ve got a traditional job that you’re happy with. You might simply talk to your employer about increasing your salary.

That said, many people look to earn a passive income on the side, and so-called portfolio working is also becoming much more common.

Some people treat their equity or property investing as a core part of their own ‘household business operations’ too – and those that don’t might consider doing so.

I suggest you try combining your salary with your extra income to derive your overall on-target earnings.

In my experience, stating what you want to achieve and regularly reviewing it can be a powerful way of focusing on your day-to-day salary and income goals.

Paying yourself first is a proven way of boosting your long-term savings.

Why shouldn’t employing yourself first grow your income, too?

Whether you call it factor investing, chasing the return premiums – or you use the once-trendy but now sounding increasingly like walking into a bar and declaring “Hey daddy-o, I’ll have a Babycham” term Smart Beta – trying to get an edge by exploiting biases in the market remains controversial.

A few hedge funds do it to great effect.

Others flounder.

Among passive investors the debate is if anything fiercer.

Indeed the idea of a passive investor pursuing a specific ’tilt’ to try to beat the market smacks some as a contradiction in terms.

I’m not one of those people – my definition of ‘passive’ is wider than most – but plenty of big guns have had a shot.

Vanguard founder Jack Bogle says:

“Smart beta is stupid; there’s no such thing. It’s an idiotic phrase.

Quoting Shakespeare, I guess: It’s a tale told by an idiot, full of sound and fury, signifying nothing.

It’s just another way of saying, “I know I’m going to be above average.”

Active managers are just trying to come back and say there is a better way to index, when they know damn well there isn’t a better way.”

I don’t think Jack’s a fan.

Everything but the Krypton Factor

One inevitable hurdle with factor investing is it takes a simple if weird idea – that by just buying the market and not paying anyone to try to do better, you probably will do better – and obfuscates it to the n-th degree.

That’s not appealing to the passive investing mindset.

For example, we’ve covered most of the return premiums on Monevator…

• Value
• Size
• Profitability
• Low volatility
• Momentum1

…yet I suspect only the geekiest2 of readers have read them all in full.

Even after explaining how to build a risk factor portfolio, my own co-blogger The Accumulator then wondered aloud whether it was really worth it.

Confusing stuff.

Video on factor investing

Still is your curiosity piqued?

Naturally I’d be delighted if you read all our articles on return premium. (I suspect they’re feeling a little lonely).

But you could start instead by watching this interview with Cliff Asness, the founder of AQR Capital Management and a student of efficient market titan Eugene Fama.

Mr. Asness covers most of the bases and gives his views as to why these factors might exist – but he does it with the accent of a wise-cracking gangster from a 1950s crime flick.

I find him very personable:

Just don’t be scared when the interviewer says:

“Now, when I read the very latest papers on risk, let me tell you what I see.

I see talk of the third moment of probability distributions, the fifth moment, words like coskewness, terms like the U‑shaped pricing kernel, and talk of the volatility of volatility.

I’m just waiting on the paper on the volatility of the volatility of volatility.”

…because Asness waves all that away.

There’s also a full transcript on Medium.

Finally, for the other side of the argument you can read our own Lars Kroijer explaining why everything except a total market tracker is hokum in his view.

1. This one is not yet accepted by the grand seers of the Chicago School of Finance. [↩]
2. From one investing geek to any others out there. [↩]