Before I started focusing all the time I spent faffing on the Internet into one blog, I posted a lot on various money forums.

One phrase I used a fair bit was ‘your future self’. To be honest, I think I assumed I’d invented it.

Not in a self-aggrandising way, you understand. More like you presumably know what you had for breakfast.

However, it’s become clear in recent years that either:

A) I’m overdue a Noble prize in economics for coining the concept of ‘the future self’, which has gone on to be used everywhere

Or,

B) The term ‘future self’ was in action well before I pinched it.

I’m an autodidact dilettante when it comes to economics (and pretentious vocabulary) so perhaps you know full well that the concept of the future self was coined by, say, Carl Jung in the 1930s, when he was too lazy to diet, and wanted a conceptual get-out clause. (Or perhaps he was just looking forward to spanking Keira Knightley).

Whatever my accidental hubris, a reader kindly thought of me – perhaps remembering my post on borrowing from your future self – when he saw this TED lecture by Daniel Goldstein on the battle between your present and future self:

Goldstein’s insights seem appropriate as we make our New Year’s resolutions.

[continue reading…]

Some good reads from around the web.

There is more to investing in index funds than pure cost saving – a point well made by Rick Ferri in my post of the week:

As I look back over the last 12 years, what is most impressive about index investing isn’t the rock bottom fees or respectable long-term returns, it’s how index investors avoided thousands of disasters in the marketplace that torpedoed the savings of millions of investors.

Index investors were not the victims of dozens of Ponzi scams or hundreds of multi-billion dollar corporate and municipal bankruptcies, nor were they they casualties of poor investment advice from self-proclaimed market experts.

When index funds fail, they fail because the market falls.

True, I do suspect we’ll see some unexpected incident some day – a good reason to avoid synthetic ETFs – but at least index funds aren’t compromised at birth.

[continue reading…]

Whether you choose to buy a house or rent is one of the biggest financial decisions you’ll ever make.

The sheer cost of houses compared to crisps, cars, and fancy shoes means this was true even 50 years ago.

Nowadays you could pay five or six times average earnings to get onto the property ladder. At today’s high house prices – even in the midst of a slump – the risks of making the wrong decision look greater than ever before.

Is there reason to believe today’s levels are justified, or will UK house prices fall?

In the next few posts I’ll explain how we got to today’s high house prices, and consider if there’s any justification for them.

I can’t tell you for sure if or when UK house prices will fall further, but hopefully you’ll feel in a better position to make your own mind up.

Why house prices matter

Most older people (say 50 or over) will tell you that you can’t go wrong in buying your own house.

Few of the older generation invested much money outside their home. The capital gains they saw from rising house prices – even as inflation reduced the burden of their once-daunting mortgage – was beyond their wildest dreams!

A few gnarly veterans do however warn that prices can go down as well as up.

I see both sides.

I know that house prices can go down. But I also think that NOT buying my own home a decade ago was my biggest financial mistake.

True, saving hard for my aspirational loft apartment (hey, I was young!) got me interest in investing, which is my passion now.

Would that be true if I’d bought a flat and spent my surplus income on broken boilers and Banksy prints?

I doubt it. Buying a house would have been a far easier path to wealth, however.

A little knowledge is a dangerous thing, and my knowledge that London property looked expensive compared to incomes and renting kept me from buying. Yet prices still kept rising.

• Friends who bought naively thinking “London house prices never go down” made a killing.

• Those of us who knew prices had fallen before and so could again have paid for it.

Should you care about house prices?

You might ask what does it matter? Why are the British obsessed with property?

After all, you could choose never to buy a house, and to rent all your life. Some people do exactly that.

The huge advantage of buying your own home is that you lock in the cost of living in it when you buy. Once you’ve paid off your mortgage, you only need to pay the cost of maintenance to keep living there. No more rent!

In contrast, someone who rents will need to pay ever rising rents throughout the next 25 years, when they could have been paying off a mortgage – and beyond that into retirement, too.

They’ll also miss out on any capital gains from rising prices, which are especially attractive because price gains on your own home are tax free.

On the other hand, it’s much easier to move if you rent. You don’t have to pay for decoration and upkeep, either, which you can estimate will cost you about 1% of your house’s value over the long-term, unless you fancy living with the equivalent of an avocado bathroom suite for your whole life.

It’s worth noting that the house price indices completely ignore these extra costs of ownership, and also the cost of adding value through loft extensions and other improvements.

Even so, most people have made a good profit by buying a home in the UK over the past 40 years.

Are UK house prices too high?

This is a financial blog, and I am not going to consider the lifestyle benefits of living in your own home in any great detail.

I’m also not going to go into the morality of high house prices, and the fact that young people are disadvantaged compared to the old by endless house price appreciation.

What you want to know is are house prices too high, or will they come down? The rest is personal opinion.

Next part: Historical UK house prices.