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.

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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.

Having re-embraced capitalism like only a 2,000-year old culture could do, the Chinese are also getting our traditional diseases of affluence.

No, not chronic obesity (yet) but the other kind of conspicuous consumption, and all its attendant evils.

That rich Chinese consumers like a bit of flash won’t come as a shock to anyone who has been following the earnings of companies with luxury brands.

While doomsters wonder how we’ll ever sell anything to China, firms like BMW, Tiffany and Burberry have been queuing up to load containers returning to Shanghai with our high end tat fanciest goods.

‘Keeping up with the Wangs’ researchers (genuinely!) call it.

Apparently the knock-on effects of judging yourself by your stuff versus your neighbours’ – as opposed to your devotion to the Glorious Chairman – is even affecting Chinese stock portfolios, the Wall Street Journal reports:

Compared to investors in the poorer provinces of China, those in the wealthiest provinces put more of their portfolios in stocks headquartered nearby (presumably because they aren’t tainted by proximity to the rural areas).

Wealthier Chinese investors also trade more in smaller stocks (perhaps because that makes them feel they are “in the know” relative to people who aren’t familiar with these names).

All this demand appears to have driven smaller stocks to steep prices, although high valuations haven’t discouraged wealthier Chinese from continuing to invest.

Quite the contrary: That seems to brand these stocks as a kind of luxury good, making them still more desirable.

Curious as these findings are, they won’t be wildly relevant to many of us (except perhaps Anthony Bolton, as he tries to pep up his flagging China trust). The Chinese stock market remains pretty tiny in the grand scheme of things.

No, this was the bit that struck me:

People in China’s richest provinces already report lower levels of happiness than those in the poorer areas. Extravagant housing prices, traffic jams, pollution and the pressure of constant social comparisons will do that to you.

Despite the sad universality of affluence and envy, I think China is probably a couple of decades away of being rich enough to afford to protest about it.

Then again, given China’s cavalier attitude to pinching our best ideas, perhaps Chinese anti-capitalism will soon go ironic full circle in Tiananmen Square?