Good reads from around the Web.

According to the PricedOut campaign as quoted in The Guardian, it’s better for a first-time buyer to forgo Help To Buy, and instead rent and save for a larger deposit and a cheaper mortgage down the line:

The organisation compared the average monthly cost of renting with the cost of repaying an average mortgage around England and Wales and found that the interest rates on Help to Buy loans meant it was cheaper everywhere to rent than to buy.

In London, repaying a 95% loan at a rate of 4.99% cost £1,437 a month based on the price of a typical first home of £256,000, compared with average rents of £1,141.

The gap was smaller elsewhere, but even in the north-east where average rents were £533 a month, according to the latest LSL index figures, PricedOut said it was more expensive to service a 95% mortgage. It said to repay a loan on a property costing £104,000 would cost a first-time buyer £584 a month.

London has gone absolutely bananas. Again. I was chuckling at some investing literature the other day suggesting that a landlord look for properties that can be rented out for 1% of the purchase price. By that measure, my two and a half bed terrace in West London should rent for at least £5,000 a month!

In reality it costs me £1,600.

Who is the nutter here, me or my landlord? Property in the UK inflames passions and opinions, and there will be no shortage of people who’ll say he’s an idiot speculator at the top of the biggest bubble / Ponzi scheme in history.

I used to confidently say such stuff 9-10 years ago. Then prices doubled again.

Others, particularly the old, the traditional, and the closely acquainted with me, will point out renting gives you no asset at the end of 25 years. I’ve now been renting in London for over two decades, counting my student years1. This is no longer a purely theoretical matter.

A once in a thirty generation opportunity

The reality is that at today’s interest rates – the lowest for at least 300 years in the UK – my landlord is doing okay. In fact after the crazy price rises of the past two years in London, he’s doing far better than okay in capital terms.

As someone who prides himself on his investing nous, I can’t dismiss lightly the fact that my landlord has made at least £100,000 over the period, and I helped fund his bet.

On the other hand, if/when interest rates rise, the economics fall apart. As one Guardian columnist notes elsewhere in response to the PricedOut maths:

A £200,000 mortgage may, just, be affordable at around £1,200 a month on today’s rates. But it only needs the base rate to rise from 0.5% to 2.5% to push up repayments by £250 a month.

If rates were to rise to 4.5%, the homebuyer would be forking out £500 more a month, assuming he or she is on a mortgage that moves with the base rate.

The elephant lurking in the room in London and the South East is house price appreciation. That’s what stands ready to shit on sit on those who’d try to be too clever and sensible about what has long seemed a blatantly bonkers price boom.

It’s not always like this, nor everywhere. We have a PricedOut campaign in the UK because our house prices never properly fell. As things stand, our young people need either rich parents or extraordinarily lucky career paths (statistically speaking – it’s irrelevant that your nephew Barry got an internship at Goldman Sachs, there aren’t ten million of those to go around) in order to buy a decent family house fit for 25 years where the jobs are.

Or they need to emigrate. In the US, where property was at the epicentre of the 2008 crash, it’s a different story. Few people there now expect much more from their houses than that they keep up with inflation. If anything they’re too pessimistic, in my view.

He’s a mug, I’m a mug

My late 2011 bet to buy housebuilders instead of a new house here in London has paid off in pure return terms. The shares doubled and tripled in value in just two years. If I was a hedge fund manager, I’d be being interviewed for the Sunday supplements. Go me!

No so fast. It’s virtually impossible to keep up with the gearing benefit of a mortgage when prices are rising. The house I sit in – and rent – has gone up £100,000 in 18 months. It’s forecast to do so again over the next three years.

Making six-figures with the help of a bank is easy money of the highest order. I’ve known people who can trace six-figure returns from London property back to one decision in the late 1990s to get onto the ladder by sneakily amassing a deposit via some credit cards. They hadn’t saved much before and – bar the forced saving of a mortgage – they haven’t since.

It’s hard not to feel like dumb money in the face of that, whether you’re a 23-year old who is priced out, or a 40-year old who missed his chance because he thought he was smart enough to know better.

Prices in London are insanely high, and those who buy despite that keep making money.

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1. In the mid-to-late 1990s London property was very cheap. My problem was I had no Bank of Mum and Dad, and also that I was a freelance. But no excuses, I could have bought somewhere cheap. I missed my chance [↩]

Most of us are taught as children that work is a healthy, enjoyable thing. And it can be – especially if you’re on the receiving end of someone else’s labour.

It’s also undeniable that unemployment has blighted generations, leaving entire communities such the former industrial heartlands of the North and Wales drifting for generations when the work went away.

If work is so important, why give it up?

1. Most of us don’t enjoy the work we do

We might get some vague sense of satisfaction from playing a productive role in society, but Monday mornings are too often painful, and Sunday nights are bittersweet. If you spend the day clock watching, you should certainly also be wishing forward your retirement date.

2. There’s more to you than your career

Remember when you were a kid, when you made friends easily, were interested in everything, and struggled to learn the clarinet? Was it growing up and growing old that did for your sense of possibility? Or was it more the rigid routine of the 9-5? (Or the 9-6, or 9-7, or 9-8?). Get your sense of wonder back.

3. It’s a big world out there

How much have you seen? And are you really seeing it at its best in just two weeks on a whirlwind luxury eco-tour that you’ve barely relaxed into before you have to go back to the office to pay for it? You might have to rough it if you retire early, but you’ll also have more time to enjoy the view.

4. You can work at something else

Most people can think of a job that they’d rather be doing during work time.

What would you actively value and enjoy? Marine biologist? Dog walker? Artist, busker, small business owner, primary school teacher, surf instructor?

“Nobody on their deathbed says, ‘I wish I’d spent more time at the office.”
– Anonymous (but they’d be welcome around these parts)

Very few high-flyers do their dream jobs – because they can’t get what they want on their dream job salary. But if you’re retired with an income, what do you care about the pay? (Actually, even a modest part-time salary will really help with a comfortable retirement, but that’s for another day).

Personally I don’t intend to ever fully retire, as such. But I’m getting close to retiring from having to work, and that makes all the difference.

5. You can do good deeds with all your free time

Lots of charities, political groups, and fledgling businesses are short of the skills and manpower needed to make a difference – and that’s a real difference, that impoverished people and places will be better for. If you want to, you can help one that’s close to your heart.

6. You’ve probably done enough for your kids

By the time a child leaves university, the average middle-class parent has lavished a six-figure sum on raising, educating and amusing them, not to mention keeping them clean. Then they ask you for a house deposit. Fine – you love them and they’re worth it. But should you keep working for them until you drop, just to fund an inheritance?

If you’re close to retirement age already, ask them: They’ll possibly tell you to spend the lot. At least that’s what I told my dad.

7. The hours are great

Ever had a sickie and noticed how much more pleasant the world is when everyone else is cooped up in the office? Shopping is a joy, there’s no one on the beach, the roads are empty.

Okay, slight exaggeration – that’s more for a future article on The Benefits of Retiring After Nuclear Armageddon.

The little perks are real enough though, such as leaving for your holiday at an odd midweek time that most people can’t make because of work. It might just save you enough to pay for two!

You can get a taste of this greener, more pleasant land by downshifting to work from home on your way to retirement.

8. It’s fun

Look folks, you’re not at work! You can do whatever you like! If you really can’t think of anything great to do with a little money and a lot of time, then contrary to prevailing wisdom maybe you’re exactly the kind of person who needs to retire and start looking. We pass this way but once, whether we’re 45 or 65.

“When you stop doing things for fun you might as well be dead.”
– Ernest Hemmingway (Who lived up to it…)

(9. You’ve little to lose by trying)

(Okay, we’re whispering this reason because it kind of goes against the grain. But even if you get to your designated job-free day of reckoning and after a month find yourself climbing up the wall, wishing that you were still working, then… then so what? Go back to work. Okay, you’ve missed out on a few holidays and luxuries over the years by saving for something that you didn’t actually need, but any early retiree who goes back to work should have a great pot of cash to ease the pain.

If you find you hate retirement, then maybe chuck half your total investment pot into some long-term financial provision, spend the rest on a sports car, a flat in Rio, and family trips to New York for the weekend. And then return to the office. You’ll still enjoy a comfortable retirement some day, just a shorter one.)

10. You can’t take it with you…

…unless you spend your loot freezing your head for future generations to revive. Such antics lie beyond the scope of Monevator!

Good reads from around the Web.

Why don’t hedge funds just track the indices? I mean this as a (semi) serious – albeit rhetorical – question.

On a rolling basis the returns from their current methods look lousy, as we were reminded again this week by FT Alphaville:

…stock-trading hedge funds had produced returns of just 8.7 per cent total in the previous three years.

Though it’s a shame the S&P 500 is up two-thirds, with dividends, since the end of 2009.

On the face of it a hedge fund could just track a stock market index and cream off its 2/20% cut, and beat most of its rivals.

But in reality things aren’t so simple.

For starters it’s not really fair to compare a basket of hedge funds with a pure equity index. While I’m skeptical of the wider claims for the hedge fund industry, I concede some do hedge, some may achieve absolute returns year-on-year, and some do deliver uncorrelated returns.

True, even those that do will probably be beaten by a simple 60/40 equity/bond ETF combo, after fees, but the point is you can’t really compare an equity index in a bull run with a wider variety of trading strategies.

Oh yes, fees. That’s a bigger reason. Passive indexing works mainly because it’s cheap. If a hedge fund holding just index funds still syphoned off one-fifth of their investors’ returns, they’d by definition still do much worse than pure index investors.

But I think the biggest reason is probably marketing.

Total money invested with hedge funds continues to grow not because their returns are good, but because the story is:

Hedge funds can’t tell their investors they will simply hold mix of passive funds and rebalance, because nobody is going to pay up for that – even if the results are comparable.

No, people like to think they’re different, special, and deserving of special insightful managers. They will pay to be indulged in their fantasies.

For as long lives such delusions, so will hedge funds.

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