Good reads from around the Web.
Every now and then a reader asks me to update one of the older articles on property and house prices here on Monevator.
I usually say I plan to — and usually I do plan to.
But whenever I knuckle down to it, the whole subject is too depressing.
Obviously a bubble?
Quite often I meet young value-minded investors for whom London property in particular is clearly in a crazy bubble.
They are appalled that I don’t agree that an imminent crash is a slam dunk certainty.
I say that I might if I was standing in their shoes. My problem is London house prices first looked to me like a crazy bubble in 2004.
Besides, far more often I meet people who say “you can’t go wrong with London property”, including members of my own friends and family.
One is weighing up leaving London, or else using the six-figure deposit she’s saved hard over her ten years in work — together with the highest mortgage she can get with her (latterly) £70,000 a year job — to buy a two-bed flat in Zone 3 in the East End.
Madness.
But will it ever end?
Everything in me that’s a value investor says yes — including my awareness that my reticence to voice that London property is in bubble territory, after being wrong for (most of) the past ten years, is probably in itself a sign of a bubble.
But the animal in me is fearful. It sniffs the air, sulks, and returns to its den.
Numbers of the beast
Some useful stats on all this in The Telegraph today, in an article that asks if the average working life is no longer enough to pay for a house:
Official figures suggest there are about 400,000 over-65s still with mortgages, a figure that is growing by about 10% per year. And as Telegraph Money reported recently, European figures show that one in five of British 65 to 69-year-olds is still working, a far higher proportion than in Germany, France, Ireland, Italy or Spain.
Why? To pay off their mortgage, of course, or scrape a bit more towards a pension, or both.
The article is a rarity, in that it combines the plight of older home almost-owners with that of the young.
It also gives lie to the nonsense that it has always been this hard for the latter:
The ratio between property prices and wages has shifted so enormously that house buying today is as difficult for buyers with two wages as it was 35 years ago for a single borrower on just their own income.
Today’s first-time buyer – putting down an average £30,000 – would need to borrow 3.4 times a single wage, compared with a borrower 35 years ago needing 1.4 times his wage, to purchase the equivalent property.
As for London:
Say you’re a hugely lucky buyer with a 20% deposit (£100,000) to put down.
Assume the average rate you’ll pay over 25 years is 5% – a generous assumption, given rates over the past 25 years have averaged higher.
You’d still pay around £2,340 per month and just over £700,000 in total.
It’s generally said mortgage costs shouldn’t exceed half of a household’s after-tax income. But for £2,340 to equate to less than one half of post-tax income, an individual would have to earn £87,000 in today’s tax regime (£4,800 per month after tax).
And that’s the average property in the capital – not the comfortable family home that an averagely paid accountant or doctor might have afforded in London in the Eighties, but which today would cost £2m or £3m.
Generation wars revisited
The most depressing takeaway from all this?
The suggestion that 60-somethings with mortgages should use the new pension freedoms to release cash to pay off their debts.
It’s probably good advice, as no doubt the poorer among them will eventually be able to pass means-tests for pension top-ups or similar, which I’d bet will look at incomes and investments, but not at personal places of residence. 1
But as a sustainable solution for the nation, I think this is ridiculous.
The correct thing for older people living in big houses they haven’t paid off to do is to sell-up, move somewhere smaller, and put anything leftover into their pension.
And to free up a house for a young family at the same time.
I once had a bitter, bitter argument in an online forum that I eventually had to leave about this sort of thing, when I said I had no sympathy for 65-year olds rattling around in 5-bed houses who were struggling to meet their heating and council tax bills.
Sell! Move!
Apparently I was utterly uncaring and heartless. Because I saw a bigger picture of need, not a micro-hardship.
Well that was a decade ago, and things have only gotten more crazy.
I’ve discovered in unrelated discussions that even most Monevator readers disagree with me that inheritance tax should be, say, 95% over the first £100,000. 2
So I suspect that equally few among the phew-we-made-it middle-classes will be on my side when it comes to my call for mass-downsizing.
An Englishman or woman’s home is a castle. And once they’re in it, they’re jolly well entitled to pull up the drawbridge, right?
Even if they can’t afford it, and even if it is turning the next generation into peasants.
I so wish the whole caboodle would crash, before it gets even uglier.
- I am speculating about the future here, not talking about the specifics now or yesterday.[↩]
- Whereas incomes I’d tax at a flat rate of perhaps 25%, after raising the personal allowance for lower earners. Earn more while you work, contribute, start businesses or invest. Get much much less because dad died.[↩]
, anyone?) the phrase “you get what you pay for” usually holds true with everything from cars and computers to education and ice cream.
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