Serious capital losses can reduce our appetite for risk, just as surely as a night clutching the toilet bowl will put you off eating raw oysters for life.

But our psychological hard wiring presents us with a dilemma.

Foul, nausea-inducing returns now and then come with the territory in financial markets.

And we know these gut-wrenching episodes are liable to impact our future decision-making, because they trigger our impulse to avoid similar unpleasantness in the future.

In other words we’re prone to negativity bias. 

But common wisdom among many investing masochists veterans is that outsized profits are made after a market meltdown.

“Buy when there’s blood on the streets!” and all that charming imagery.

And if that’s true then our natural response to shy away from whatever just hurt us could do us more harm than good.  

UK equities: ten worst annual returns 1871-2022

So which view is correct?

Do awful returns fire the starting gun for massive bargains? Do you just need the testicular fortitude to scoop them up?

Or do market swan dives just as often signal that there’s more pain ahead, as feared by our savannah-ready emotional engineering?

The table below – which features real1 returns – shows how UK equities bounce back – or belly-flop – after their ten most negative single years since 1871.

Bad year	Return (%)	+1 year (%)	+3 years (%)	+5 years (%)	+10 years (%)	10yr annualised (%)
1916	-17.4	-12.5	-13.8	-36.2	50.1	4.1
1920	-31.8	8.6	71.1	137.7	181.2	10.9
1931	-16.5	37.8	99.7	167.6	78.5	6
1937	-15.9	-11.2	-28.4	-12.3	11.1	1.1
1940	-18.6	10.8	31.5	49.2	35.9	3.1
1969	-16.2	-9.4	31.8	-62.7	-12.1	-1.3
1973	-34.2	-57	-22.5	1.2	75.9	5.8
1974	-57	103.4	132.6	135.4	415.7	17.8
2002	-23.2	18.6	57	83.5	74.9	5.8
2008	-32.2	26.2	29	65.3	87.2	6.5

Real2 total returns from JST Macrohistory3. February 2023. 

One thing jumps out from this table – the severity of the first year’s losses tells us little about what’s coming next.

The very worst year (1974) led directly to the best year in UK stock market history – the 103% doozy of 1975.

Yet the second-worst year (1973) bled straight into the 1974 nightmare. (Indeed the two years fused into the UK’s worst stock market crash since the South Sea Bubble.)

Meanwhile, the third, fourth, and fifth bleakest years in our chart (2008, 1920, and 2002) were all followed by large rallies.

On the other hand, three of the five least worst-drops kept tunnelling down in year two.

More often than not, equities bounce back fast

On balance the table provides tentative evidence supporting the theory that a severe shock for shares can abate quite quickly.

This is conjecture, but perhaps in the best cases the bolder investors quickly see the panic has been overdone and pile in. Their forays restore confidence among the rest of the herd, leading to further gains.

Milder hits may not flush quite enough negativity out of the system within just a year, however. Hence there’s a fairly strong chance that escalating disquiet blows up into a deeper decline in year two.

Or maybe it’s all to do with the credit cycle or a dozen other theories…

The recovery position

Whatever the driver, a recovery is usually under way three years after the initial slump.

Seven out of ten aftermaths feature high single- to double-digit average growth. By the third-year mark, the ranges4 rove from 9% annualised (after the Financial Crisis) to 32% annualised (post-1974).

Those return rates are chunky compared to the historical average return of around 5% for equities.

Less happily: we can see three events were in contrast still poisoning the water supply five years out. And one was still pishing in the pond after a decade.

Two of these periods were hamstrung by the World Wars. The other (1969) slid into the 1972-74 crash and the worst outbreak of inflation in UK history.

Yet even these observations don’t enable us to formulate a simple heuristic such as: ‘bail out for the duration of a major war or stagflationary malaise’.

For one, the ten-year returns beyond 1916 are perfectly acceptable, if nothing to brag about.

Next, let’s examine the difference in an investor’s fate after 1973 compared to 1974.

What a difference a year makes

The post-1973 path took a decade to straighten itself out. In contrast, you were skipping along like it’s the Yellow Brick Road straight after 1974.

But realistically, how many investors who’d just been through the 1973 shoeing would be itching to double-down after the -72% roasting inflicted by the end of 1974?

You’d have to be a robot – or rich enough not to really care about losing money – to wade in after that two-year bloodbath.

Still, if you held your nerve you were handsomely rewarded. Returns were close to an extraordinary 18% annualised for the next decade.

The really unlucky cohort were the 1969-ers. These guys suffered a relatively mild recession at the tail-end of the ’60s, but they then ran smack into the 1972-74 W.O.A.T.5, and ended up with negative returns after ten years.

Ultimately, these investors recovered to 5% annualised respectability.

But it took 16 years of keeping the faith to get there.

World equities: ten worst annual returns 1970-2021

How does the picture change if we look beyond UK equities? We have good data on the MSCI World index going back to 1970.

Let’s see how quickly (or not) global equities bounce back from the abyss:

Year	Return (%)	+1 year (%)	+3 years (%)	+5 years (%)	+10 years (%)	10yr annualised (%)
1970	-10.2	2.1	-2.2	-25.3	-37.9	-4.6
1973	-22.6	-38.1	-10.5	-27.8	7.2	0.7
1974	-38.1	23.4	16.1	0.8	116.8	8
1977	-19.7	0.6	-11.5	15.8	136.2	9
1979	-13.7	1.9	33.4	115.1	311.1	15.2
1987	-11.8	22	-2.6	26.5	112.5	7.8
1990	-35.5	14	59.1	83	213	12.1
2001	-15.6	-28.7	-11.3	8.8	4	0.4
2002	-28.7	18.1	49.4	60.4	57.4	4.6
2008	-20.3	12.4	14.1	50	126.8	8.5

Real total returns (GBP) from MSCI. February 2023. 

Quick aside: last year’s -16.6% loss slots in at no.7 on the World Annus Horribilis chart. But I’ve excluded that result because, well, we don’t know how it turns out yet.

The pattern of the worst routs leading to the best rebounds mostly holds true on the world stage, too. 1973 proves to be the exception once more.

We can also see the past 50 years has been much kinder to stocks than the first half of the 20th Century. There were no World Wars, Great Depressions, or what have you.

Nevertheless it still takes five years before a majority of the sample periods turn positive.

At the three-year mark, half the pathways are underwater.

But five years on, and only two scenarios are negative. Of the goodies, two are positive but miserable, two have average returns, and four above-average to superb.

Finally, at the ten-year mark, three of the timelines were all told a thankless slog. (Think working in the laundromat in Everything Everwhere All At Once.)

The others are all excellent though. Well, except for post-2002. It hovers right around average.

UK gilts: 10 worst annual returns 1871-2021

Now let’s consider UK government bonds.

Year	Return (%)	+1 year (%)	+3 years (%)	+5 years (%)	+10 years (%)	10yr annualised (%)
1916	-32.5	-17.7	-36.7	-35.2	8.6	0.8
1917	-17.7	-7.5	-38.3	6.1	44.8	3.8
1919	-16.8	-19.7	38	65.4	98.7	7.1
1920	-19.7	27.4	90.5	106	188.1	11.2
1947	-19.9	-6.5	-17.1	-38.3	-50	-6.7
1951	-17.2	-10.2	2.3	-19.3	-31.7	-3.7
1955	-14.5	-7.7	-5.3	-12.4	-10.1	-1.1
1973	-16.6	-27.2	-20.5	-8.7	26.8	2.4
1974	-27.2	10.9	38.3	17.3	73.3	5.7
1994	-12.2	14.5	38.2	56	99.3	7.1

Real total returns from JST Macrohistory. February 2023. 

Quick aside part two. Last year’s -30.2% ranks at number two in the UK gilt all-time losses chart. But again 2022 is excluded due to crystal ball malfunction.

First thing to notice is that the UK’s worst one-year bond losses aren’t much more gentle than our grimmest stock market losses. (And they’d be nastier still if we threw 2022 into the mix.)

Partially that’s because the UK’s historical gilt benchmark was stuffed full of highly-volatile long bonds. Bond drops are gentler if you stick to shorter durations.

But much of the story hinges on inflation. In fact the only three positive years in the ‘+1 year’ column occurred because heightened inflation fears subsided, rather than escalated.

Roll the time-tape on three years, and the only middle-ground is the post-1951 nothing burger.

Every other path is either a double-digit return spectacular, or else it’s negative growth purgatory.

But it’s the five-year column that really shows how a bond bounce-back can be arduous.

Fully 50% of this sample still remains in the red at that point. Whereas we’d seen 70% of UK equities bounce back by the five-year post-crash mark.

What was that about slow and steady?

Remember, over the long-term we’re not expecting much more than 1% annualised real returns from government bonds.

Yet by the time a decade has elapsed, only one outcome from our sample of worst starting points has delivered anything like that.

Four of the following decennial returns are equity-hot. (That’s good!) Two are great, at least for bonds. But three would leave you ruing the day.

That latter trio of roads to nowhere (1947, 1951, 1955) were all caught in the middle of the UK’s biggest bond crash. Inflation kept slipping its leash and mauling the real returns from fixed income.

Hope for the best, but be ready for the worst

While none of this data is predictive of future outcomes, I think we can draw a few general lessons.

Firstly, the worst equity crashes are not predictive of more slaughter to come. The majority are a reset that auger better days ahead. Equities bounce back and usually sooner rather than later.

If you’ve just taken a heavy hit in the stock market then your best (but far from guaranteed) route back to profit is to hang in there. The market should fairly quickly pick up speed again.

Eventually any market will almost certainly right itself. That’s why equities and bonds have positive return records going back 150 years and more.

But the rebound may not happen according to a timetable that suits you. The longest string of successive negative returns for UK equities was 12 years straight.

Incidentally there’s also an outlier pathway in the historical record that does nicely for 18 years, and then collides with World War One. That calamity saddled 1897 equity investors with a negative return after 25 years!

An extreme event for sure. But it helps illustrate why 100% equities is a risk. The expected returns you’d planned for may not be there when you want them.

Do you have bouncebackability?

Most of us are likely to go through the investing meat grinder at some stage in our lifetimes. That’s the price of entry as an investor.

Just think of all the big crashes recently. How many investing experts managed to swerve the Global Financial Crisis? The Covid crash? Or the inflationary shock of 2022?

Predictive power is in short supply. Rather it’s staying power that we need.

We say keep your head together after a bad run and don’t chase the market. Give it time and it should turn in your favour. Sooner or later your patience will very likely be rewarded.

Take it steady,

The Accumulator

P.S. This concept was inspired / shamelessly cribbed from US asset manager and author Ben Carlson. See his post on US stock and bond rebounds. But I’d just like to say in my defence that I’m a big fan of Ben’s work. And I’d do it again, so help me!

1. That is, inflation-adjusted. [↩]
2. Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns. [↩]
3. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
4. Three-year annualised return, not shown in the table. [↩]
5. Worst of All-Time! [↩]

What caught my eye this week.

Three years ago this weekend I began to write on Monevator about the new coronavirus, which by late February had gotten the attention of the markets:

Things were definitely feeling freaky by the fourth day of 3-4% declines.

When the US market bounced higher into the close on Friday – perhaps on the expectation that central banks will make some sort of statement about interest rate cuts this weekend – you could almost feel the relief, even though all the main indices still ended the day in the red.

UK government bonds, for the record, are up.

Unstoppable

Just in case you’ve been living in a bunker – which is where we’ll all be in a few weeks, according to some – the cause is the novel coronavirus.

COVID-19, as we groupies have started to call it.

Together with a few geeky friends I’d monitored Covid’s spread via then-obscure health sites and academic services since Christmas. I already had my mother self-isolating. And during a rare meeting with The Accumulator on the first Sunday of February, I’d shocked him by revealing I’d sold a huge portion of my portfolio and was even holding gold.

That all sounds very smart and prescient. But the fuller story is far more muddled.

For starters I’d bought back a lot of my equities just two to three weeks later!

The market wasn’t crashing, you see, and it’s usually right. I started thinking that maybe @TA was correct that this virus could prove to be just another localized SARS-type outbreak.

Notes from Underground

Unlike many people, I’ve a written record here on the blog – especially in the comments – of my thoughts over the weeks and months that followed.

This reminds me what I believed as our understanding of the virus evolved. As opposed to what I wish I did!

It’s a good check on hindsight bias and selective memory.

Some things I was ahead on, such as the long-term disruption caused by repeated lockdowns. I’d argue the way things played out also vindicated an early belief that we should overwhelmingly concentrate on protecting the oldest people. I was right too to get optimistic about shares again as soon as late March, when the fiscal spigots opened. And I correctly favoured technology firms.

But other stuff I got very wrong.

In retrospect I couldn’t get my head around the virus being a dial-shifting issue for years. I kept looking for signs of a speedy resolution – maybe as soon as the end of 2020. My efforts at being an amateur epidemiologist did afford me moments of insight.

But overall I would have done better just to listen to the pros. Although many of them were, like me, too optimistic about the ability of vaccination to halt transmission.

The Plague

Anyway all these debates played out in the comments on this website – and that itself was interesting too.

In the early days we had a free and open debate. Regular commentators took varied views, but I’d say there was mostly an understanding that there were open questions and we were all feeling our way in the face of something personally unprecedented.

But after just a few months some sort of crystalizing took place. Positions hardened. Politics entered the picture in a big way. And like most things in our benighted political times, what began as a health issue became a binary them-and-us stand-off.

At the least I shuffled across one side of that line too.

Being and Nothingness

My aim in recalling all this is definitely not to do any sort of finally reckoning as to who was right about what – let alone who ‘won’ the pandemic.

Too many are doing that now, especially in the US.

The worst of them are almost willfully dismissing or forgetting just how uncertain and afraid we collectively were in those early months of 2020, as we watched hospitals overflowing with the dying from the enforced confines of our own homes.

And it’s rather that which I want to recall.

Trivially, the time has come to remove my ‘Covid Corner’ as a regular section in the Weekend Reading links.

The virus is endemic. And though some would say the pandemic isn’t over, 60 seconds on any High Street shows that nearly everyone who can do so has moved on.

But it’s more what that crisis confronted us with that I want to put a pin in today – before we trundle into the next furore.

Because it’s rare to see your world turned upside down in a matter of weeks as happened in March 2020.

Even if you’ve come to see the lockdowns as a sort of pleasant holiday from reality, say, the fact is that for a period the authorities compelled you and most people you know to stay at home, while at the same time going out could conceivably get you killed.

Normally a country needs to go to war for such existential disruption. Sadly Ukrainians have had a double-dose of it in the past year, but if we’re lucky many of the older among us may never face such a period again.

I think it’s worth some intentional archiving.

Waiting for Godot

For myself, I want to store away the feeling of uncertainty. The spectrum of fear. The collapse into tribalism. The strangeness of shopping and swerving among the other masked figures. The oscillating emotions towards those who broke the rules. The groping for answers.

The specter that seemed to stalk us.

The debates about this or that policy will continue for a while. But in time they will become accepted truisms, depending on how you lean. Like the Thatcher government’s response to the Miners’ Strikes or US involvement in Vietnam.

The nuance will be forgotten. Yet even now scientists can’t convincingly decide if masks made a meaningful difference to transmission, for example.

It’s nuance all the way down.

I’ll end with some great lines from Yeats. I’ve always liked the sound of them. But the past seven or eight years have also shown me the truth of them:

Turning and turning in the widening gyre   

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere   

The ceremony of innocence is drowned;

The best lack all conviction, while the worst   

Are full of passionate intensity.

Never waste a good crisis, say the politicians. They mean the chance to bury bad news or to take tough decisions.

But I’d hope a crisis might also teach us to be a little wiser too.

Have a great weekend – and let’s enjoy our freedom to do so.

[continue reading…]

Can you believe it? My own sister uttering the dreaded words:

“I am just throwing money away by renting.”

Ouch! That’s up there with “renting is dead money”.

She might as well have added, “You Only Live Once!” and then spent her ISA savings on a YOLO tattoo.

Before we begin: I’ve learned that it’s impossible to write about UK property without provoking an outburst of emotion – from every faction – so a quick nod to the laundry list:

• Yes, people want to own homes for different reasons.
• Yes, at the end of 25 years of renting, you’re still renting.
• Yes, houses look cheap / expensive, depending.
• Yes, a homeowner must pay costs every year to stop the place falling down.
• Yes, an owner can make a big tax-free gain on their property investment.
• Yes, mortgage rates may go up / go down / do the Hokey Cokey.

But that is not what I’m talking about today.

What I’m questioning is the idea that renting is inherently wasteful and that having a mortgage is inherently productive.

Let’s unpack this to see why my sister has compounded the damage she did by watching The Water Babies on VHS 20,000 times and then crying and claiming I hit her when I tried to make it stop.

Renting is: paying for something valuable

First off, renting is nothing like throwing money away.

When you throw money away, then – unless you’re Robin Hood, Brewster, or in fear of St. Peter – you get nothing back.

In contrast, when you give money to your landlord, you get somewhere to sleep, eat, make whoopee, and write investing blogs.

Here is Maslow’s famous hierarchy of needs:

Maslow rightly understood that ‘shelter’ was crucial to human beings. We tend to freeze, rot, dry out, get eaten by animals, or are plagued by packs of foreign exchange students without it.

In fact, Maslow stated shelter was as important as sex, food, and air – but maybe not in that order.

(In the modern world, you don’t get much sex without shelter. Although to be fair you will then get more than your fair share of air.)

Housing, in short, is a basic human need. This is what your landlord gives you in exchange for rent. An essential of life! Maybe my sister should send her landlord a thank you card, rather than a dismissal?

But what about home ownership? Is that essential?

Sadly, Maslow didn’t tell us where “ability to hammer a nail into own wall’ or “opportunity to take part in house price bragging” fitted into his pyramid. He lived in simpler times.

My hunch is – daytime property porn be damned – that Maslow would consider such things to be self-actualization, topping the pyramid alongside philosophy, ballet, and drinking mint juleps.

What is a mortgage in legal terms?

A mortgage is a loan used to buy property. It’s an agreement between you and a lender that involves the latter loaning you the money you need to buy a property (or else a way of raising money against the value of a property you already own).

When you take out a mortgage, you agree with your lender to pay it back the capital you borrow – plus any interest accrued – over some prearranged period of time – typically 25 years – and at an agreed interest rate.

The interest rate you’re charged may vary with market rates (a so-called variable rate mortgage) or more commonly be fixed for some years.

In the UK, fixed-rate mortgages typically run for two to five years. After that period you’ll go onto the lender’s variable rate mortgage, unless you take out a new fixed-rate deal.

Other types of mortgages are available. For instance, a discount mortgage varies with your lenders’ variable rate. But a discount is applied so you pay a little less.

Note that in the UK1 interest rates will fluctuate over the lifetime of your mortgage.

This means that when any fixed-rate mortgage or other deals expire – or on an even more regular basis with a variable rate mortgage – your borrowing costs will be recalculated. Hence your monthly payments will vary.

When do you clear the mortgage?

Most home buyers take out a repayment mortgage. Here the total borrowing cost – including interest – is calculated at the start of the arrangement. You steadily pay the interest and repay the principle via a schedule of monthly payments.

Interest-only mortgages are also available. These are particular popular when buying investment properties. With an interest-only mortgage you only pay the interest over the term of the mortgage. You pledge to repay all the capital at the end of the term (say 25 years).

Most repayment and interest-only mortgage agreements do allow you to make payments in excess of what was initially agreed, however. These extra payments can dramatically reduce how long it takes you to fully pay off the loan, and hence the total cost of borrowing.

Play with our mortgage calculator to see how you can reduce the cost of your mortgage. (It’s as close as it comes to getting exciting about a mortgage.)

Finally and crucially, note that a mortgage is a secured loan. It is backed by the value of the property you buy with it.

Putting up your home as collateral like this makes a mortgage much less costly than other personal loans. But the quid pro quo is that the mortgage agreement gives the lender the right to seize your property if you fail to keep up with your payments.

A mortgage is money rented off a bank

So far, so conventional. You take out a mortgage to buy a property in exchange for a monthly bill – and the risk of losing your home if you don’t keep up with your payment schedule.

However I believe it’s helpful to think a bit deeper about what a mortgage really is. Like this we can exorcise some of the dogma of home buying.

Because despite that aforementioned fabulous need-solving you achieve by renting, most people still aspire to swap paying the monthly rent for a new life as a mortgage-shackled wage slave.

Even I did the deed eventually.

And there’s nothing wrong with that. Buying their own home is the best investment most people ever make.

However there’s nothing magical about a mortgage.

And it certainly isn’t free.

Rentaghost in the machine

When you buy a house with a mortgage, the bank gives you money, as discussed.

Let’s say it gives you £200,000.

Party time! (I’m assuming hedonism for you is 30 days and nights on Rightmove.)

Once the initial euphoria of home hunting is over, a new mortgage owner begins the slog of paying the darn thing off.

And it turns out – obviously – that the bank didn’t give you £200,000 for nothing. As we’ve discussed it wants interest on the mortgage.

It’s as if it leased you the money. You’re paying to rent the money off the bank.

• At 5% over 25 years, borrowing £200,000 will cost you £833 a month in ‘money rent’

You have swapped rent payments to your landlord for rent payments to your bank.

Note again that if you only ever pay your ‘money rent’ and nothing else, then you must give back the £200,000 borrowed at the end of the mortgage term.

Just like you have to hand back a rented house to your landlord!

To avoid this – and to keep your home – then you must repay the capital also.

Effectively, with a repayment mortgage you’re buying £200,000 in cash off the bank, in monthly installments.

• With a 5% mortgage rate over 25-year repayment mortgage deal, you’d need to pay an additional £350 every month to ‘buy’ your £200,000 off the bank.

You might even think of a mortgage as a cash savings account that starts £200,000 in the red. With a repayment mortgage, you’re salting away £350 a month. After 25 years, the balance is £0.

Happy days!

Equally, if you can rent your home for less than you’d pay to buy, then you could choose to save the difference. You might even save up £200,000 that way.

Note: I’ve oversimplified here. As already flagged up, monthly repayments are in reality variable over the mortgage term as they fluctuate in some fashion with interest rates.2 Capital payments are a smaller share of the monthly bill at the start but predominate at the end, as your previous repayments reduce the interest due. Again, check out the graphs via the Monevator mortgage calculator.

Only money under a mattress is dead money

Of course no bank these days will lease you £200,000 without some security.

The bank tries to protect itself twice.

Firstly it demands a deposit of at least 5%, but frequently much more.

Secondly there’s that inconvenient fact that it can repossess your house should you fail to repay the money you borrowed (/rented) off it.

Let’s say my sister has had enough of ‘throwing money away’ and wants to buy a flat for £500,000.

She’ll likely need at least £25,000 as a deposit – and I’d strongly urge her to aim for £50,000 or more – in order to appease the bank’s money landlord.

Of course, you have to give a deposit to a property landlord to rent their house, too.

But when I last rented a place, I put down one month’s rent – or only about 0.25% of that property’s market value at the time. Bargain!

The opportunity cost of a mortgage deposit

As interest rates on cash have recovered, the situation has become even starker. Today, my sister’s would-be deposit cash is only dead money if she keeps her savings under a mattress.

I can think of little worse than looking under my sister’s mattress, but I’m sure there’s no money under there.

Instead, my sister has her money in savings accounts, bonds, and the stock market.

Even if she simply puts her would-be house deposit cash into a super-safe fixed-rate savings account, she can currently earn 4% or more.

That’s hardly dead money.

By the same token, it’s not dead money if the cash is used to get a mortgage.

If you’re paying a mortgage rate of 5%, then your deposit is effectively in the equivalent of a savings account paying 5% interest, tax-free.

That’s nice, too.

Again, I am not saying one arrangement is inherently better or worse than the other. I am saying these decisions have more in common than you might think.

The deal when you pay rent

Buying a house basically involves:

• Deposit + interest payments + (usually) capital repayments + other costs (legal fees, taxes, new boilers, renovations, and so on) + the gain or loss in house prices

Both private owners and landlords also get an income from leasing out their property.

As a home owner you get the better deal, since you rent it out to yourself, tax-free3, whereas a landlord leases it to a third-party tenant who might not pay and who won’t clean the gutters. Worse, her rental income is liable for tax.

In contrast, as a rental tenant your landlord handles most of the faff for you.

Renting simply involves:

• Monthly rent + a month’s deposit

Whereas the deal for the landlord looks something like:

• (Everything listed for a private homeowner above) + void risk4 + rent payment risk5 + some landlord-specific costs + income tax + (likely) capital gains tax

Your landlord also takes on risks on your behalf. There’s the risk that house prices will go down for starters, as well as the risk that interest rates will go up.

Of course landlords do all this in expectations of making a profit over time. I expect house prices will rise over 25 years, and rents too. But there’s no timetable – and it’s still a risk.

So a landlord deals with a lot of faff, takes risks, and satisfies a key human need.

That’s quite the deal you get for “throwing money away” by renting a home instead of buying.

You decide if it is a good time to rent money

Once more with feeling: none of this is to say that it’s not a good time to buy a property, or vice-versa, or to rent, or vice-versa.

When I wrote the first version of this article in 2013, house prices seemed very expensive to me, especially in London.

Luckily, I noted back then that I’d been wrong about prices for a decade. And now another decade has passed and prices are even higher again! But they’re apparently wobbling…

So who knows.

What I was confident about, however, was that borrowing was cheap in 2013.

I wrote:

I do think it’s a good time to rent money.

With five-year fixes under 3%, a big cheap mortgage looks a steal.

We saw money get even cheaper to rent for many years after that – as low as 1%!

The cost of money eventually did rise quite a bit in 2022, however, as the Bank of England hiked interest rates. Mortgage rates spiked further in October 2022 with the Mini Budget farrago.

But rates have since come down again. Indeed it’s interesting to see people (not me!) predicting 40% price falls when five-year fixes are available at 4%, given that ten years ago money already seemed very cheap with fixes not vastly lower at 3%.

Of course the difference today compared to 2013 is even-higher house prices.

Property prices have grown far faster than wages have increased, too.

Which way will you rent?

Sadly, banks will only rent money cheaply to most of us to buy homes, and homes seem expensive. There’s the rub.

But the point is: renting a home isn’t throwing away money. It’s paying for a service.

And a mortgage isn’t free. You pay to rent money.

It amuses me that the conventional thinkers who say renting is dead money are also often the same people who say paying off their mortgage was the best feeling they ever had.

Make your mind up! Do you like renting money or not?

Note: Original article updated in February 2023, so comments below pondering what is a mortgage and/or the meaning of life may be out-of-date. On the other hand this stuff is pretty timeless. See you in 2033, across a rubble-strewn landscape and so on!

1. Unlike the US where you typically lock in a mortgage rate for the entire term when you buy. [↩]
2. Whereas, for example, dividing £200,000 by 25 years worth of monthly payments is £666 a month. [↩]
3. It is called imputed rent. Please don’t complain to me, follow the previous link if you want to learn more. [↩]
4. The income-less gaps between tenants. [↩]
5. The money stolen by tenants who don’t pay. [↩]