I was pleased – and a bit rueful – to read Mr Money Mustache making the same case for renting over buying a home in expensive locations as I have often used myself:
The mustached millionaire of opt-in-and-out leisure writes:
When choosing between buying versus renting a house or apartment, people are making much, much worse choices than I would have thought possible.
The implications are so striking that logically, some of the world’s busiest stretches of road should not even exist.
We could save millions of lives and trillions of dollars by just helping certain people operate a basic hand calculator at a beginner level.
He then looks at case studies of how renting a property in Toronto and New York – right in the heart of the action – is spectacularly cheaper than buying in swanky suburbs and spending a fortune of commuting.
I was pleased to see the same analysis that I’ve used myself coming from one so versed in making moolah from bricks and mortar.
Who doesn’t like a bit of positive reinforcement?
Theory teary
So why was I also rueful?
Because following the logic of my conclusion that London property is grossly overvalued has cost me, conservatively, at least £200,000 – even after backing out the investment gains I’ve made elsewhere.
Awful awful awful.
Property price rises like we’ve seen in London – and Toronto, I guess – make a mockery of these sober-minded price-to-rent comparisons. Only something like a 30-50% crash in London house prices can save me from a lifetime of slapping my head whenever I think about it now.
Of course, I’m a money saving and investing whiz and all! So I’ve built up a very sizable warchest elsewhere. I’ve even made plenty of money from the shares of housebuilders, which has some tangy sense of irony about it.
But so successful has this investing effort been that I now have a significant six-figure sum outside of tax shelters.
This is sort of a disaster, because it means that should I cash in my unsheltered portfolio to buy a property, I’ll face at least a 28% capital gains tax hit, promptly obliterating a huge chunk of said property-substituting hoard.
The £11K or so tax-free allowance is routinely described as “generous” by personal finance bloggers, including my co-blogger The Accumulator.
But it’s not so generous if you end up doing something slightly different from the herd.
I was therefore starting to think I’d just rent for life on the back of the dividends, but of course those are now set to be taxed, too.
Why are you even reading this blog?
I’ve considered London property ‘too expensive’ for about the past 13 years, which was when I backed out of an almost flat purchase as soon as I got the chance.
In contrast, numerous friends put down 5-10% deposits on London property (usually but not quite exclusively raised from family, not savings) and then got a big chunk of other people’s money via a mortgage, which they have doubled or tripled over the past 15 years.
This vast gain can be realized entirely capital gains tax-free – a massive tax perk that I think should be extended to those of us who rent, but never will be.
Worst of all, over dinner they then discount all this, saying idiotic things like “a home is not an investment” and it’s “only a paper profit”.
They’re wrong, but they’re the one’s who’ve made out like bandits, and I’m the muppet daring to write an investing blog despite my glaring failure to profit from the biggest property boom of all time happening in the streets outside my door.
Reminder: Everyone is fallible!
Especially me.
From the blogs
Making good use of the things that we find…
Passive investing
- Where’s the evidence? – The Evidence Based Investor
- The simplicity portfolio – The Escape Artist
- Don’t judge diversification over the short-term – AAAI
- What to do when an ETF is shut down [Ignore Canada specific bits] – CCP
Active investing
- The market is cheap, given interest rates – Expecting Value
- Gold is the worst investment ever – Servo Wealth
- A quick overview of the Simply Wall Street website – mcturra2000
- A dozen things learned from Paul Tudor Jones about investing – 25iq
- More on pricing country risk – Musings on Markets
Other articles
- Top Ten list of when not to invest – Rick Ferri
- The exchange rate conundrum – Retirement Investing Today
- I don’t want to be rich, I want to be free – Early Retirement Guy
- Frogs catching flies and your brain when investing – Value Perspective
- The definition of insanity – No More Waffles
- Mustachian spotting: UK – The FIREStarter
Product of the week: According to The Telegraph, the new two-year and three-year cash ISAs from Skipton match the current Best Buys. You get 2% with the two-year product, and 2.1% if you go for three years.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Roth: How to beat the S&P 500 Index – AARP
- Robo-advisors set to disrupt UK wealth management – ETF Strategy
- Swedroe: ‘Gurus’ without a clue – ETF.com
- You don’t need to know about 99.3% of all ETFs – ETF Reference
Active investing
- Swedroe: Ignore the dividend hype [US but relevant] – ETF.com
- A rare interview with Nick Train, the inactive active manager – ThisIsMoney
- Stop thinking about markets as if they were human – Bloomberg View
- Roth: A contrarian case for precious metals equities – ETF.com
Other stuff worth reading
- Mr Money Mustache: Freedom is the best part of early retirement – Vox
- …on the other hand these people like working at 70, 80, 90 – Guardian
- “I own most of my street”, says 26-year old BTL investor – Telegraph
- Rewards of working hard are too big for Keynes’ vision [Search result] – FT
- What it’s like to live at Google for 13 months – Bloomberg
- Suicide on campus and the pressure of perfection – NY Times
Book of the week: Older – usually retired – people who learn about my penchant for investing will often share a few war stories, but then shake their heads and mutter something about “kids today”. The feeling seems to be that they’re hopeless with money. I don’t buy it (I just think the pressures on them are far greater than were on today’s 60 to 70-somethings) but I don’t doubt their parents’ and grandparents’ concern. Blogger Ben Carlson hears the same laments, and recommends The Opposite of Spoiled
Like these links? Subscribe to get them every week!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
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Hello TI
I’m a regularly reader of your page every Saturday. You are not the only one who has been wrong for 13 years! I recently looked around houses.
We have a 120K deposit saved up. We’ve looked a a few places around where we live and they seem to be not as nice and poor value compared to our rented accommodation.
We looked at a New Build Recently, and the figures broke down as 120K deposit, 101K Help to Buy(Sell) from the Government and a 284K mortgage. We were 30K short on the deposit to qualify for the help to buy, and the house builder wouldn’t even consider a 30K deposit. The housebuilder would accept full asking 505K with 15K stamp duty paid, but would not consider 495K with stamp duty paid so they are really holding out.
Anyway, this would be very financially risky to say the least. In the current situation in renting our risks are having to move with two months notice. We’ve been in our current place sometime so I think this risk is low.
If we bought the place above we have swapped this risk for:
– Exposure to the housing market (currently at or near it’s peak – but have been wrong for 13 years!)
– Exposure to interest rate rises – we could potentially fix for 5 years but what about the other 15+ years of the mortgage
– Risk of losing job with no savings
– Risk of owing over 385K
It seems the choice is renting a nice place and financial security, buying a not as nice place with less financial risk or buying what you would really like and taking on a huge debt and hoping for the best!
Well that’s life!
I sit here on a Saturday waiting for these posts to turn up and what do you know, it’s about something I want to comment on.
Don’t beat yourself up for having a diversified portfolio rather than a large proportion of it in property. How upset would you be if the property market crashed? Following the changes to leveraged Buy-To-Let taxation in the Budget, there’s a real possibility this could trigger a correction in the currently overpriced housing market. Dominic Frisby wrote a great article for MoneyWeek:
http://moneyweek.com/how-george-osborne-could-kill-off-britains-buy-to-let-business/
Maybe you aren’t old enough to remember that property in London fell 30-50% late eighties to early 90s
You will however be old enough to see that gold halved 2011 to now
These things aren’t over till the fat lady sings
Mostache man is chock full of rubbish:
> Then we retired from real work way back in 2005 in order to start a family. This was achieved not through luck or amazing skill, but simply by living a lifestyle about 50% less expensive than most of our peers and investing the surplus in very boring conservative Vanguard index funds **and a rental house or two.**
The UK is in a total mess thanks to the boomers voting for property handouts. Focus on brushing up your skills enough to emigrate.
Just like that other liar you had on a while back , the Money Tree one.
@Neverland — Hah. Oh yes, I am super familiar with the London property cycle. I was urging friends to buy in the mid-1990s, after getting out of university to find property virtually being given away in retrospect at the end of that crash you mention. I read an article by David Smith in The Sunday Times arguing that this was just a cyclical trough, not a widespread abandonment of buying in favour of renting, as was being argued at the time.
Unfortunately I then moved around the country for 2-3 years before returning to London and prices 50% higher. Even then I might have bought but by then I wanted some sort of bargain to justify my previous incredible brilliance at seeing the property cycle was going to turn. That stupidity/arrogance is the further nail in my coffin, as by the time I realized it for what it was it was 2004 and I genuinely did (and perhaps still do) believe London prices had become detached from reality.
@DW — Perhaps. I have seen more triggers than a factory worker at Smith & Weston. 😉
@Dave — I wonder if as we get older watching property prices climb away from where we first saw them, we become more risk averse too. That isn’t to say prices aren’t stretched by all metrics except mortgage-payments-to-income (due to rock bottom mortgages) but that maybe the young are better at taking on those risks — and indeed better placed to take them on?
You cannot win ’em all and it’s always easy with hindsight. However, from what you’ve intimated over the years, you’re still relatively young (circa late thirties), I haven’t seen you mention that you have poor health and that made more than enough money to buy a house and some freedom outside the Capital. I’m not worried about you. It sounds like you’re jealous that your buddies have made as much or more than you with less effort and with support that your family couldn’t give. A least you can say you put more thought into it and earned it (though some would argue this if most of your wealth was largely generated through speculation on the stock market).
Neverland – can’t win in the UK now. It’s so deep into property if there is a big correction it will be the next leg down for the UK.
My advice: work hard, only polish internationally marketable skills and thereby prepare yourself for an exit.
Would be good advice after stepping out a time machine in Greece in 2000 when they all thought cheap credit and property were the way to go, no?
@willem — I’m sort of jealous of course but also (a) the capital gains factor is material and (b) I pride myself on investment savvy. That said, this whole sorry episode has
made me savvier.
Anyway, I think I’m perfectly entitled to assess these outcomes regardless of the fact that I have other options. Isn’t that what we all do, all the time?
And I’m not blaming anyone else for my misfortunes, incidentally. My stupid fault! 🙂
@ben — the next leg down for one of the richest countries in the world that millions more want to live in. I think we’ll survive. 🙂
Not made it to the links yet, and yet with our favourite lede-writer beating himself up, feel I must post a comment from a wise blog somewhere:-
“That is not to say that some particular mix of assets won’t turn out to have been the best choice over your lifetime.”
http://monevator.com/costs-trump-the-best-asset-allocation-decisions/
We can all do better in hindsight. The question is not whether you could have out-guessed the market but whether you could have been more disciplined in applying your asset allocation in hindsight. Well we all sin a little in the Church of Passive Investing. I’ve already realised that my lax rebalancing is biased towards bull markets, and I need to be more strict with myself when it comes to making the trade rather than holding out for a 1% better price.
Having made the choice not to own property, you stick to your guns. Screw down those landlords and move with freedom to low cost locations. Shout loudly for the end to PPR relief. Enjoy the freedom from having a massively overweight portfolio in property. It’s terrifying on the other side of the fence, those historical returns are like an overweight sword of Damocles.
I happen to think of property a little like wine. I don’t know if wine is a good investment, but I do know that I am going to need some of it as I grow older. If it turns out to be a great investment, I’ll sell it and drink gin in a smaller house. Otherwise I’ll drink the fruits of my failure weeping in my valueless mansion.
My only other thought is that property is a bit special: you get to leverage your property investments in a way that simply isn’t allowed for your pension or ISA, and the tax position is (currently) absurdly favourable with a lot of voters who will say that it stays that way.
Investor – fair enough but most who want to live there are from very poor countries.
What do you think of my Money Moustache comment? How is a guy who isn’t sure how many rental properties he has (one or two!) some kind of savings hero? The guy is living off of other people who are being frugal so they can pay him rent.
http://www.mrmoneymustache.com/about/
He’s a “family man” whilst other families work and forgo saving a pension.
Second time you cite a rentier as you haven’t looked close enough.
If all you’ve missed out on is 200,000 pounds in 13 years, I’d call that a WIN no? You’re more liquid, and diversified. Maybe you will rent for life, but that’s not so bad.
You do realize MMM makes hundreds of thousands of dollars a year at least writing about frugality and renting to the masses right? That’s the key to wealth!
Financial Samurai has it on the head. That guy is a frugal fake.
Be more circumspect in your sources Investor or you lose 200k and your credibility.
I must admit I am confused by the mixed messages.
I thought passive investing was all about *not* trying to be clever by timing the market. Holding for the long-term.
Yet you seemed to have held off buying a property purely because you were trying to time it.
I bought my first home at the last peak in 2007. Originally I thought this was a terrible decision. I’m about to sell it and buy another property (perhaps at another peak, who knows). My house value has recovered, which is nice, but so have all the houses in the area I’m moving to. So I’m not sure it makes much difference.
I intend to be in this next house for 20-30 years or more. And like my passive portfolio I have setup, I won’t need to care about peaks and troughs!
So I guess my question is, why are you still trying to time the market?
Some of MMM’s advice ay sound a bit rich considerating his circumstances, but it doesn’t mean it’s not good advice..
I think what grates is the feeling that you’ve worked hard and studied hard the art of investing, stockmarkets, how various asset classes fit together etc. and made measured financial decisions.
Whereas your London-property owning peers have been rewarded for not bothering with any of that, and leveraging up to the hilt in arguably reckless/feckless fashion, and bailed out whenever they did take on too much personal debt because their houses were climbing even more.
Like anyone that works in London I know several people – in fact the majority of colleagues over 40 – who have made a small fortune by never really bothering with the stockmarket even though they work in finance, investment banks, even wealth management companies.
They may have a token pension but most of the time 90%+ of their net worth will be in their main home and maybe a BTL on the side. They moan they will have to work into their 60s to pay off the mortgage, although some could escape the rat race already if they down valued (I hesitate to use the word “downsized” as invariably a cheaper country house will be bigger as well).
I don’t know what the answer is today, its a tough call balancing record house prices, vs record low interest rates, vs shares and bonds looking peaky and not looking like offering stellar returns after the last 6 years.
I wouldn’t speculate on house prices rising ever higher, but I’d certainly hedge against it by buying a pad outside London so you could commute from there, or let it out until you plan to move there.
Just as many of your peers maybe ridiculously overweight UK property, I couldn’t sleep with everything in the stockmarket. What if the shares crashed 50% – I bet your rent wouldn’t drop.
@paul — I’m an active investor. My co-blogger The Accumulator is the passive in practice person. I am just certain passive is best for most, and maybe ultimately me.
@ben — Lay off the nasty vibe thanks.
@semipassive
Easy come. Easy go. If you make that money by mistake then the chances are fairly good that you’ll lose it by mistake too.
I don’t think TI is about to make the kind of mistakes that these people you speak about are going to, and he should very good about that.
TI – now I have made it past the tightening of the cilice, thanks once again for assembling a great set of links this week.
Of course I find the two gold ones interesting, wrestling as I am with tiny amounts of the barbarous relic, and I’m afraid that the logic in both is flawed. One dismisses gold because its yield is low (cf every other asset class that isn’t emerging market equities), and casually casts aside its role as a counterweight by arguing that it’s impossible to achieve or irrelevant: I’d rather like to see the actual maths on that as the only analysis that really looked at that in detail was rather positive, suggesting that the rebalancing yield of gold in the long term is around 5% (I can’t find it immediately, I’m sure it’s in Monevator somewhere). The other seems to think that the time is right for a reversal of fortune without much more than a feeling.
I enjoyed TEA, as ever, wonderful writing. Although I think his proposed portfolio is one that relies heavily on a belief that you can time the market. The inclusion of VHYL (which I love and hold) suggests a fear of the big Apples and Amazons of the world being overvalued (which I am scared of), but that’s quite a position and one that requires monitoring. His allocation will change over time as relative CAPEs shift. I think it’s a great portfolio, but not really as simple as it suggests. The people referred to in the introduction could hold a much simpler portfolio and not do much worse. (75%VWRL, 25% Cash, anyone?) I do admire its explicit calculation of fees.
The rich / free and other pieces on retiring vs working continue your theme from articles last week which left me wondering whether it was selfish or short-sighted to aim for very early retirement rather than fulfilment and contribution to society through work or enterprise. Is self-fulfilment always indolent? Nearly never, I’d suggest, but it might not be economically productive. Thought-provoking and indeed good motivation for the armchair as it says on the tin.
TI,
I know how you feel. That Telegraph article (http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11767771/I-own-most-of-my-street-buy-to-let-investor-26.html) says it all.
“The Thetford local said he first became interested in property in 2006 when house prices in his area fell by up to 50pc.”
“Mr Windsor said he protects himself against headwinds by continuously stress testing his business model.”
but
“All 11 properties are still mortgaged, with 80pc on interest-only loans and 20pc on a capital repayment basis.”
What happens when we get the next 50% fall? That such plainly absurd leveraging has paid off in the housing market for such a long time is down-heartening.
Apologies my comment above sounds whiny. I should say that I’ve done well in my investments (no doubt like yourself TI and no doubt aided by this excellent website).
However, the reality is, renting in the UK is a fraught process with: rent reviews, admin fees, short notice periods and difficulty in getting things ‘done’ in your home.
I think it is the detriment to all that so much money is plunged into housing rather than investing in companies.
@l
Leverage is the difference that amplifies skill, luck or lack of both
Property is the only investment that joe punter can get 900% leverage on
Leverage works both ways however
Can anyone explain how one computes the yield on a btl? In relation to the article about the 26 year old property baron he claims a 19% yield but he rents out at 650 a month and the cheapest property he mentions is 65k. 650 * 12 = 7300. 7300 / 650000 is 12 %. That is a long way off 19%. I must be working it out wrong? But I thought it was as simple as gross income / price of property?
On the TEA article I wonder how you rebalance when you start off with a portfolio that moves away from a market cap allocation? Do you stick with US at 10% or does that change in some deterministic way based on some cape measurement relationship? I can imagine it gets complicated quite quickly to maintain. Maybe that’s why he’s hoping you will stump up 160 notes for him to tell you how to do it?
The TEA portfolio look pretty lethal to me and I think a novice would be better off listening to Uncle Lars. VWRL and VGOV – choose your mix.
The US is the economic engine of the world, like it or not, and a paltry 10% when the capital flows around the world are saying 50% is certainly contrarian. Maybe TEA will be shown to be right but the strategy is a guess really and most investors would be better off diversifying more widely and logically.
As I bought my first flat with 15% interest rates I’m was amazed that the market rose as rates declined. It seems that people only look at repayments, not risk of default. I bailed out of the market in 2003 expecting a fall, and no, it rose, fell and rose. I kept my endowment going (crap investment I couldn’t face analysing and stopping) and it pays out in October, £25k, and of course I can buy a house with that!
My worst decision was holding my house money in cash until last year, always expecting to buy somewhere. If only I’d been bold in 2009 and slapped it in the trackers then. But I could have done that in 2003, or 2007, and be rueing those decisions. So you really can’t time these things.
I still believe the only real way to have money make money is for it to sweat in companies, passive assets like gold, houses or antiques shouldn’t be able to compete. But I keep being proved wrong because other, less rational, souls go for them.
At least pumping my pensions since 2009 has worked. Pound cost averaging is the friend of passive investors, and trickle investing/divesting is the one thing you can’t do with a house.
We only make or loose money on houses when we sell them, even then it may be just the volatility of equity. For some it is real cash as with all investments if you buy and sell at the wrong time.
Given the UK economy and pension issues it seems sensible to me to make sure you have a house to live in when your employment income declines as well as having some investments to top up the income.
Property you live in would seem to be a no brainer, providing its where you can live and travel to work or rent. We promote not trying to time the market and buy and hold, is property to live in any different?
@The rhino
He says he has 80% LTV mortgages.
You’ve worked out the gross yield.
If his £65,000 home has an 80% mortgage at 4.5% interest only, his mortgage is £2340 per year. He still gets £7800 in rent. A profit of £5460. Assuming basic rate taxpayer he loses 20% of that and is left with £4,368.
£4,368 divided by £13,000 is a yield of 33%.
That’s the effect of leveraging. You get 100% of the rent whether you put down 100% cash or a 20% deposit and borrowed the rest.
As long as borrowing is cheap, it’s always going to make the returns better. However it also has the opposite effect when interest rates are high!
@DavidG thanks very much. That makes a lot more sense
Wouldn’t beat yourself up too much about it, as painful as it is. I have friends in London who have done similar. They said with some confidence years back that they will get a property on an interest only mortgage and move out of London in the years to come and cash in on the inevitable gains. A crash could still come of course, but at the moment they are sitting pretty with no realisation of the hellish amount of risk they took and continue to take. They save little but are miles ahead of me in terms of Net Worth. Haha, perhaps I should have taken that job offer way back in 2004 in London…
Really enjoyed the NMW article on insanity.
Mr Z
hi TI
Do your friends have a 6 figure investment portfolio as you do?
you’ve done really well with your investments, being in the market when steller gains were on offer, maybe now is the time to switch stratergy.
you sound early 40s to me, maybe buy a property outside London where you could commute from either live there yourself or rent it out .put a deposit on it from your investments just enough where you wont be hit by CGT and spend the next 10 years or so diverting all your money to paying off the mortgage instead of investing. then use your isa allowance to shelter those assets you have that will be hit buy the new div tax. I do think property will only go up in value.
you sound such a nice man , you help so many people with your blog , you and TA are like ‘friends’ to so many of us readers and we really appreciate this site. life work out in the end.
You are upsetting yourself with a classic “benefit of hindsight” outlook.
We have all been there! I did buy a London property in 2004 at what seemed at the time like an eye watering price. It has of course now virtually doubled. However I kick myself because I started to try and buy a flat in London back in 1997. It seemed expensive to me then (and it was relative to my low earnings at the time) but I got outbid a few times and then lost my job and withdrew from the market. I missed out on the really explosive price gains. I will forever be a lot less wealthy than I could have been.
I have subsequently made some really good money on share options by working for a small fast going company and on the other hand not followed through on some investments that would have made me a packet. My outlook now is that you make the best decisions you could have at the time and the outcome subsequently has a lot to do with luck.
I have to say that I am with Ben and Financial Samurai. MMM smells bad to me. I enjoy his site but I don’t really believe he is practicing what he preaches. Too much salesmanship to ring true. He admitted himself at one point he was making $000’s a month from credit card referrals.
What do you think of the rent vs buy numbers for the UK? If you put some example figures and UK-relevant values into the buy/rent calculator mentioned by MMM
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
do you think one comes out ahead numerically of the other for reasonable scenarios? Not quite sure what a reasonable scenario actually is though!
I don’t have much of value to add here but @TI please don’t beat yourself up too much. You’re nowhere near the end of the game yet so you could actually come out on top. Those guys got lucky, but you’ve actually made your money the hard way – and one of those options is sustainable in the long term, and the other one isn’t.
I was in pretty much the same position. I was far too nervous to buy a property in case I lost my job, which was crazy in hindsight, and I also started work in 1997 in London which if memory serves was just as prices started to soar, while I was on a new graduate salary. I should have bought something anyway but I thought it would be a massive risk. (Negative equity! Rising interest rates! Unemployment!) I finally did buy somewhere three years ago (at 36), and I’m kind of figuring it will probably be OK – I am working and saving like a demon to pay the bloody mortgage off, I am a high earner and since I bought it to live it I will be gutted but it won’t actually matter if the price falls 30%. (I’ll just wish I’d waited to buy.) But I’d probably be retired by now if property prices hadn’t boomed, and since I want to retire in London I won’t see any real benefit if prices continue to rise as I’ll “never” be selling.
I’ve certainly listened to my share of self-congratulatory property stories and I know how it feels to be surrounded by smug gits who made a lot of money on property by sheer chance and attribute it to some innate personal skill. F*** them! 🙂
@TI
You are unique and that’s why you never boarded the boat full of crazies en route to property owning smug land ermm serfdom. You are free and that should actually be the best reason to buy a property, to give you the freedom to live under your own roof blah, blah.
But for most, buying property is buying into a slavish relationship tying you to a system of labour, debt and interest payments to debtors. It’s all a smoke screen that makes property owners feel like they have made it, but in fact they can only truly realise their gains by selling up and leaving the system. If they sell up and move to improve they are really no better off as the new property will be similarly over valued.
I have to admit I have really gone off MMM in the last year or two. His blog posts come across as supercilious now. I’m fed up with all the cars and houses talk. He makes people feel either bad or smug and that can’t be right. Sorry if I appear critical of his blog but you are way above him in all counts, regardless of who has more money, houses, friends, cars, followers, subscribers, women or babies – I think those things don’t count. I know this is an investment blog but it isn’t judged by what you have or haven’t achieved personally, unlike the track records of the fund managers and big shots scrutinised in the world of finance.
Thanks for this blog, I love reading it.
@all — Thanks for all the comments, both the insightful ones about property/strategy and the plain supportive. 🙂
(Regarding me being nice, I’m very much the mini-rogue with the heart of gold, to The Accumulator’s genuinely good guy persona. He’s certainly Luke Skywalker, I’m Han Solo on a good day. 😉 )
I wasn’t really looking for reassurance to be honest, though it’s very nice to receive it — rather I think it’s important to be somewhat transparent if you’re going to write about these things, and given I sometimes adopt the air of someone who knows what they’re talking about, it’s important that you all see I think that at least in one major area of this ‘game’ I have (‘so far’ only, you’re right) got it spectacularly wrong!
I do admit I’ve sort of given up on expecting to be proven right in the long term with property. As I mentioned in an earlier reply, these days I am overwhelmingly an active trader/investor (which is why I brought The Accumulator into the Monevator fold — because he is a passive purist, and I genuinely believe that will prove best for most, maybe even me) and the fact is if my property ‘trade’ was an equity investment, my current trading discipline would have me confronting the mistake in the face and moving on. (E.g. I don’t really have truck for active investors who say they “were right” that the market was overvalued and ripe for a fall if it only goes down 10 years later… sorry, you missed the in-between… and it’s no different for me and property).
I do give myself a sort of a pass on a sunny day like today because I think very *very* few people saw interest rates at 300-year lows, and I am sure this a major catalyst for this latest hurrah in London (even when it’s ‘disguised’ as money from foreign investors and so forth — I think it’s still being driven by the impact of low interest rates) but it’s not an excuse, just a reason not to feel grumpy on a sunny Sunday, where I’m in my nice rented house and about to walk to an annual festival in my area that I’ve grown to love. So I can’t complain (much…!)
Regarding MMM, everyone is entitled to their opinion but I have deleted a bunch of negative-to-nasty comments about him, and a few about me suggesting I’m some sort of irresponsible / borderline moronic patsy for having my own view about a blog by a bloke on the Internet.
I’m not interested in fermenting more nastiness in the too-nasty-already Web.
So I’ll just quickly state my view: I read MMM before almost anyone, since back when his site was very new (it was much smaller than Monevator) and I swapped a few thoughts with him. I thought he was great with a unique voice from day one. I spent a lot of time trying to convince TA of the same, but he took a long time coming around! 🙂 I don’t find anything at all inconsistent with his message; if I’d earned as much as he and his partner did and lived in a lower property priced area, I am near-100% certain I’d have had a similar outcome as him.
To give a trivial example, I still happily chortle when I buy fresh bread at the end of the day that’s marked down 75%, despite my infamous investment hoard elsewhere. I wouldn’t buy it stale or go without just to save 30p though. I know exactly where he is coming from.
Ditto the whole ‘he is retired but works but makes money thing’. I am not at all surprised he has done very well, and in fact I pat myself on the back for telling him in the earliest days he was going to be huge. His message is clear, strong, funny, and I believe true. It’s of a certain flavour so clearly it’s going to rub some people up the wrong way. But that’s fine, that’s good writing.
Now he’s been successful, is he supposed to turn the income from his site away, just to please some detractors? I don’t see why. The fact he’s ‘admitted it’ is irrelevant; I think it’s just full disclosure.
If I was in debt and feeling sorry for myself, I’d read his site before I read Monevator, that’s for sure.
Ultimately, I’ve reached my own opinions about him having followed him almost from day one, like his writing, and think it’s full of truth. Am I going to change my mind because someone I have never met doesn’t like him?
When I have a full multi-year record of his postings to compare to a handful of nasty lines written on my own blog?
Of course not.
Am I going to consider myself a member of a raving mad Moonie style cult and doubt my judgement about all kinds of other things, as has been suggested in deleted comments — or do worse, with my head and elements of his anatomy, as a couple of people generously shared and that I purged?
No I’m not.
That’s my view on MMM, you’re entitled to your own, but this is also my website and I’ll publish whatever comments I think are helpful, and delete the rest.
That includes further comment about MMM, regardless of whether it’s nicely put or not. If you’d like to comment further on him, I suggest his site is a better forum for it. Cheers! 🙂
@ investor
You might like the TV adaption of “any human heart” on channel 4 catch up one of several themes is relative success against your friends, lost chances and getting old
The book is by William Boyd I think
@Investor,
You are a legend…a man amongst men….you’ve done more to further my personal finance knowledge than any other…..and I’ve ploughed through a bunch of books. With yourself and Mr Accumulator’s preachings I’m well on the way to being more passive than a sloth on quaaludes.
You deserve a knighthood and, if you look good in a red bra and leather jacket, an automatic seat in the lords.
I do however hope that the second Saturday leader in a row with a Londoncentric slant doesn’t open lead the way to more Londoncentricity in your writings 🙂
Forgive my London negativity, I think I’m just tired of the column inches devoted to whether you should lay a third strip of tarmac at Heathrow…….the biggest non-story known to mankind.
Thanks again!
I am in my late 60s now and have been a homeowner for 42 years. I live in Canada and have never been in the highest priced areas like Toronto or Vancouver.
In the time I’ve owned a house, and with a few moves I have about 20X my original sum but inflation is at least 5X what it was then. I’ve also spent plenty on taxes and maintenance as well. I also lost money on one move back in the late 1970s.
The most salient fact is that even with so called “downsizing” and moving to a smaller town I haven’t seen a penny from my real estate “investment” aside from imputed rent. It’s been a nice experience but you can’t eat a bathtub or air conditioner. I have had to rely on our pension and investment income for the necessities. So I have no regrets about staying with a modest home and not getting a bunch more rental real estate.
Well TI, now you know how most value investors felt in the stock market in 1999. With such a concentrated portfolios the risk that your friends are running is well, life-changing.
@Mathmo
“I enjoyed TEA, as ever, wonderful writing. Although I think his proposed portfolio is one that relies heavily on a belief that you can time the market. The inclusion of VHYL (which I love and hold) suggests a fear of the big Apples and Amazons of the world being overvalued (which I am scared of), but that’s quite a position and one that requires monitoring. ”
Yes we were keen on VHYL at one time. Seemed a rational choice. World exposure with a yield.
But compare the historic performance of VHYL with VWRL or IWRD.
So for now VHYL excluded.
Dividend growth ETFs have not impressed with the naive methods used to select stocks. , and the dividends can fluctuate.
If tilting to yield, then prefer ITs as discussed previously.
Some samples of Halifax House Price Index and RPI adjusted relationship to long term real price average :-
Dec 1986 £42,262 30% below average
Dec 1988 £65,442 about average
Dec 1995 £61,544 33% below average
Dec 2007 £197,244 53% above average
Dec 2012 £163,845 9% above average
Dec 2013 £173,467 12% above average
Dec 2014 £188,858 20% above average
See also Monevator ‘House prices versus earnings’in the property section.
One day prices will become more reasonable, but how or when is difficult to foresee. Maybe Jeremy Corbyn will end mortgage interest relief on buy to let, re-introduce rent controls or come up with some other wheeze. Maybe even build more homes.
When homes are priced out of reach for the average family, something has to give.
@ magneto
Nothing has to give, ordinary people barely live in New York or Venice for example….. They all commute in and out every day
But the rest of your post is correct, will the British electorate vote for a government with policies to actually do anything about it?
But on the evidence of the last 35 years of UK politics the answer is no
@TI
Nil desperandum!
Focus now on wooing and marrying a fetching, property owning, millionairess (safeguarding your own hard-won money with a shrewdly worded pre-nuptial agreement of course) and also don’t forget the £10/week on the EuroMillions – the latter of which if not the former is my little piece of “extra-investing” fun.
What does any of this matter anyway? You invest in shares, others invest in property. The cost of renting is less than the cost of owning in London. Shares increase in value by more than property historically. You therefore have lower costs by renting and you will make more on shares than property. You have made the best decision, as confirmed by MMM. So, what is the problem?
@Topman — Indeed! It took me a long-time to realize this was an option. I’ve always assumed it’d be me protecting my modest fortune, but perhaps I should turn predator, muhaha. Etc. 😉
@Ray — I’ve discussed this many times, and disagree. In my view your house is an investment. It’s just one you’ve decided not to realize, because you see advantages to owning it versus renting. That’s the whole point! 🙂 Your points about costs of ownership such as repairs etc are well-made though.
@underscored — Time will tell. The early ones have an equity cushion that could almost survive a dirty bomb, to be honest.
@Bob — You are definitely too kind, but I’ll take it. Thanks for us both, glad to have helped.
@Neverland — Indeed, great book! I’ve bought it for several friends over the years. Random reversals are indeed part of life. (I love how he does random in general, in that book. “Light Years” is another very different book that achieves the same.)
@Brian — Firstly, it’s very hard to safely leverage an investment portfolio, compared to how trivially easy it is to leverage a house. Secondly, there are enormous tax benefits to owning a house in the UK versus a portfolio of shares, to the extent that it is again trivially easy to shield uncapped wealth in a personal property, as opposed to the six-figure capital gains that would be due on my ‘house substitute’ portfolio if I decided to liquidate it to buy a home. These are problems, albeit first world problems.
Finally, I haven’t made the best decision because London property has doubled, at least, since I first made it by the same maths. I’ve made the wrong decision so far. It might be the best from here though, granted. 🙂
The Investor,
Most of what you say smacks of short-termism and market timing. Yes, the London property market has doubled over the last few years – but it doesn’t always, sometimes it goes down (late 80’s, early 90’s anyone?).
Whether you chose to own your home or rent it is really irrelevant over the long-term. If you rent in London, chances are you can live in a nicer area and have much lower costs than owning. The opportunity cost of this is lots of lovely extra money to invest in the markets. You also have greater flexibility. Sure, you can leverage the purchase of a house with a mortgage, but you pay for it in interest, which in the past (and maybe the future) has been very high, more than the return from shares. Mortgages are generally paid off gradually with income from paid employment, the same is true of investing in an ISA or a pension, along with their cummulative tax advantages.
People who have hundreds of thousands of pounds in property equity didn’t generally do this overnight. They did it over a number of years, just like people like you who have hundreds of thousands of pounds invested in tax sheltered ISAs and pensions. Please also bear in mind that, to many of these people, this is their property is just their home, they will only lock in these gains if they were to move. Your asset is yours to do whatever you want to do with it. Haven’t we already established that, for a rational people like you and MMM, buying in a city like London is a mugs game anyway?
Please don’t beat yourself up over your perceived mistake, The Investor, after all you are in it for the long haul.
Of course a key difference between tangible and intangible assets is the level of pleasure they give you. Shares are neutral, but an extra £100k invested in your home can make you smile every day as you admire the view or swing a long-tailed cat. Antiques and art can also brighten up your mood if they catch your eye.
But a big house can have high maintenance bills and be nowhere near your girlfriend, and the art can be nicked.
I’m thinking of moving when I retire to a more expensive house who’s garden I can work and re-work until I downsize when enfeebled. I suspect the £150k invested in a nice garden for 20 years will give me more pleasure than its growth in the markets.
I’m on t’other side of that bet and I lost handsomely too. I stupidly bought a house in 1989. It was the single worst personal finance mistake I have ever made. After 26 years I roughly broke even, and that’s even after paying down the mortgage a little bit early.
Equities more than made up for that screw-up; I could just about buy a house in the edges of the Great Wen, though I’d view it as a hellacious misallocation of capital, particularly now. But that money came to me when I was at the end of my working life, whereas the loss hit me in the first third of my working life – beware of leveraged investments when you have no capital…
At least you, however, had the option at any time of moving, chasing work etc, with merely a month’s notice. I had to sweat through five years of a scary downsizing operation which would have left me destitute; indeed at one point I seriously considered polishing up my German and looking for work over there to be able to run away from my mortgage in the way you can in the US. And that while Germany was going through the hurt of reunification 😉 Ben is not the only young Brit to look longingly at greener grass beyond our shores due to our rotten housing market.
In the papers at the time there were three million families in negative equity in 1992. I saw both neighbours either side of my crummy two up two down repossessed. In the same way as the zillions of private investors who lose on equities stay schtum, so do the millions who were repossessed and lost on property. Success has many fathers but failure is a bastard and all that.
For different reasons (and I am just about one of those despicable baby boomers he hates so much) I agree with Ben. UK property is a vile and loathsome asset class. There is nothing more that I would like but for an interest rate hike of flush out the ranks of BTL landlords, but sadly it will hurt the young people who are foolish in the way I was then. I paid 14% at the high water mark and about 6% as a long run average, for 20 years.
The UK government used to be the chief supplier of new houses and there was far less hurt about this essential good in my childhood when that was true – I went to school where half the kids lived in council houses including the children of white collar workers, though my parents owned and my Dad was a fitter. The Right to Buy was the worst thing that happened to housing on this island – it fed the inherent self-interest of the few at the expense of the common good. The private sector has made a revolting hash of housing in the UK and has entrenched vested interests in high house prices.
@John B – “….. or swing a long-tailed cat.”
The expression “not enough room to swing a cat” is actually believed to allude to the cat o’ nine tails, a multi-tailed whip used to punish offenders, notably in the Royal Navy, and which fell into disuse in Victorian times.
Rather appropriate that, Topman, as one of the rather nice detached houses near me in Orpington, SE London, featured in the local paper as a BDSM Dungeon. I have great fun walking past trying to guess which one. Now it would be harder to run a business like that from a rental property…
Problem solved John B, it’s the one that gets all the chain letters ~:-).
Thank you again for the round up of weekly articles.
I have a question on whether you are able to recommend any good tv shows or documentaries etc about investment.
Everything on telly seems to be about property. It can be one form of investment I suppose (sorry … ) and I remember the Money Programme from years ago. Is there anything similar nowadays?
Martin Lewis
Mrs Moneypenny
I remember 14 years back I under bid a dream property by 5k,now I couldn’t afford to buy it.
Don’t Get Done, Get Dom
@Lee
There is some interesting stuff here.
https://www.sensibleinvesting.tv/
Here are my thoughts after a few days pondering whether property is an investment. My conclusion is not necessarily.
Not all assets are investments. For an asset to be an investment there has to be the prospect and intent of making a return on the asset above costs. For example, all the cars I have owned were assets but not investments. I never expected to make a return on any car I have owned (and never have). For other people, their car may be an investment, but not me. In contrast, the bicycle I owned for commuting to work was an investment as it gave me a return above costs in saved tube fares. The bike was actually an extremely good investment, paying for itself many times over in saved fares and saving me commuting time. For other people a bicycle may be a recreational indulgence, with no expectation of return, so an asset, but not an investment.
Leading on to property, I can see why some people claim this is not an investment for them, but they are most likely wrong for the reasons articulated. It is possible that someone may choose to purchase a property with no expectation of making a return above costs (compared to renting), in which case a property is for them an asset but not an investment. The fact that a return above costs may subsequently be made does not turn an asset purchase with no expectation of return into an investment, so I think it is perfectly legitimate for someone to claim that for them their house is not an investment.
Having said all that, I have always considered the property I have purchased as an investment. But my property is more than just being an investment and somewhere to live, it is also an indulgence.
@ TI Everyone is fallible! so true …. Most of us carry these wounds I think.
during the dotcom years I worked for a wannebe Google tech start up in Farringdon just above the meat market no less. Every 6-mths used to acquire a large allocation of shares as bonus payment & so accumulated a huge amount over a period of just over 4-yrs.
Listed on Nasdaq, just before filing Chapter 11 the shares were trading at over $130 each. Lost the lot. Breaks my heart every time I see those beautiful iconic gates at the marketplace.
Some very interesting articles listed above. Thanks.