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Weekend reading: The price of high house prices

Weekend reading

Good reads from around the Web.

Every now and then a reader asks me to update one of the older articles on property and house prices here on Monevator.

I usually say I plan to — and usually I do plan to.

But whenever I knuckle down to it, the whole subject is too depressing.

Obviously a bubble?

Quite often I meet young value-minded investors for whom London property in particular is clearly in a crazy bubble.

They are appalled that I don’t agree that an imminent crash is a slam dunk certainty.

I say that I might if I was standing in their shoes. My problem is London house prices first looked to me like a crazy bubble in 2004.

Besides, far more often I meet people who say “you can’t go wrong with London property”, including members of my own friends and family.

One is weighing up leaving London, or else using the six-figure deposit she’s saved hard over her ten years in work — together with the highest mortgage she can get with her (latterly) £70,000 a year job — to buy a two-bed flat in Zone 3 in the East End.

Madness.

But will it ever end?

Everything in me that’s a value investor says yes — including my awareness that my reticence to voice that London property is in bubble territory, after being wrong for (most of) the past ten years, is probably in itself a sign of a bubble.

But the animal in me is fearful. It sniffs the air, sulks, and returns to its den.

Numbers of the beast

Some useful stats on all this in The Telegraph today, in an article that asks if the average working life is no longer enough to pay for a house:

Official figures suggest there are about 400,000 over-65s still with mortgages, a figure that is growing by about 10% per year. And as Telegraph Money reported recently, European figures show that one in five of British 65 to 69-year-olds is still working, a far higher proportion than in Germany, France, Ireland, Italy or Spain.

Why? To pay off their mortgage, of course, or scrape a bit more towards a pension, or both.

The article is a rarity, in that it combines the plight of older home almost-owners with that of the young.

It also gives lie to the nonsense that it has always been this hard for the latter:

The ratio between property prices and wages has shifted so enormously that house buying today is as difficult for buyers with two wages as it was 35 years ago for a single borrower on just their own income.

Today’s first-time buyer – putting down an average £30,000 – would need to borrow 3.4 times a single wage, compared with a borrower 35 years ago needing 1.4 times his wage, to purchase the equivalent property.

As for London:

Say you’re a hugely lucky buyer with a 20% deposit (£100,000) to put down.

Assume the average rate you’ll pay over 25 years is 5% – a generous assumption, given rates over the past 25 years have averaged higher.

You’d still pay around £2,340 per month and just over £700,000 in total.

It’s generally said mortgage costs shouldn’t exceed half of a household’s after-tax income. But for £2,340 to equate to less than one half of post-tax income, an individual would have to earn £87,000 in today’s tax regime (£4,800 per month after tax).

And that’s the average property in the capital – not the comfortable family home that an averagely paid accountant or doctor might have afforded in London in the Eighties, but which today would cost £2m or £3m.

Generation wars revisited

The most depressing takeaway from all this?

The suggestion that 60-somethings with mortgages should use the new pension freedoms to release cash to pay off their debts.

It’s probably good advice, as no doubt the poorer among them will eventually be able to pass means-tests for pension top-ups or similar, which I’d bet will look at incomes and investments, but not at personal places of residence.1

But as a sustainable solution for the nation, I think this is ridiculous.

The correct thing for older people living in big houses they haven’t paid off to do is to sell-up, move somewhere smaller, and put anything leftover into their pension.

And to free up a house for a young family at the same time.

I once had a bitter, bitter argument in an online forum that I eventually had to leave about this sort of thing, when I said I had no sympathy for 65-year olds rattling around in 5-bed houses who were struggling to meet their heating and council tax bills.

Sell! Move!

Apparently I was utterly uncaring and heartless. Because I saw a bigger picture of need, not a micro-hardship.

Well that was a decade ago, and things have only gotten more crazy.

I’ve discovered in unrelated discussions that even most Monevator readers disagree with me that inheritance tax should be, say, 95% over the first £100,000.2

So I suspect that equally few among the phew-we-made-it middle-classes will be on my side when it comes to my call for mass-downsizing.

An Englishman or woman’s home is a castle. And once they’re in it, they’re jolly well entitled to pull up the drawbridge, right?

Even if they can’t afford it, and even if it is turning the next generation into peasants.

I so wish the whole caboodle would crash, before it gets even uglier.

But will it?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Are you an active investor who is interested in UK small cap shares? Then you might want to bag tickets for Mello 2014. This brand new conference is being put together by a redoubtable private investor, and the speaker list already looks impressive. I’m optimistic the dodgier AIM companies are going to be weeded out from getting involved, too.

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.3

Passive investing

  • Munger, Harvard, and the Calpers hedge fund exit – Market Watch
  • Passive fund rankings under scrutiny [Search result]FT
  • How not to worry about a fund’s performance – WSJ [feat. Mike]

Active investing

  • A global map of the cheapest stock markets (from peak) – Telegraph
  • Thinking long-term could be your edge – Forbes
  • Apparently the super-rich are buying more gold bars – Telegraph
  • Put your money where your mouth is [Search result]John Lee/FT
  • What one manager is buying to hit his 6% income target – Telegraph

Other stuff worth reading

  • ISA transfer times down to as low as six days, say brokers – Telegraph
  • Devolution fear for financial services [Search result]FT
  • Changes to the intestacy laws on dying without a will – Guardian
  • Now is a tough time to retire [US but relevant]F.A.
  • The essential guide to big home improvements – Guardian
  • The unbearable sadness of the Welsh valley towns – BBC

Book of the week: I had coffee with Lars Kroijer this week. While he didn’t reveal any numbers, I got the strong impression that writing a book on passive investing has not proved 1/100th as lucrative as running a hedge fund. No surprise, but if just 5,000 of his readers save £10,000 over their investing lifetimes by reading his book and going passive versus using expensive active funds, that’s £50 million of extra money in his book customers’ collective retirement accounts. I’d call that a purer sort of Alpha. (It’s why we write Monevator, too).

Like these links? Subscribe to get them every week!

  1. I am speculating about the future here, not talking about the specifics now or yesterday. []
  2. Whereas incomes I’d tax at a flat rate of perhaps 25%, after raising the personal allowance for lower earners. Earn more while you work, contribute, start businesses or invest. Get much much less because dad died. []
  3. Reader Ken notes that: “FT 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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{ 67 comments… add one }
  • 51 Dragon September 22, 2014, 5:00 pm

    @ermine – fascinating fact about your Dad’s house, but another example of difference between Scotland & England. Anyone “buying” a property in Scotland can expect to get a freehold (even for flats, where Scotland has never seemed to have the issue with “floating freeholds” that England has)…

    You just wouldn’t buy a house which was leased up here. Wasting asset and all that and I’m surprised Banks lend against that in Englandshire! 🙂

  • 52 Brendan September 22, 2014, 5:05 pm

    “…and my son be brought up in relative poverty just because you want my house and my money?”

    Which leads us to the perverse situation where someone is unhappy with how closely the wealth of his son is tied to his father’s, and argues vehemently -against- IHT.

  • 53 Tedious Pseudonym September 22, 2014, 5:14 pm

    It’s not perverse, he’s 3 months old. I can’t send him out to earn his own crust for at least 6 years, and what if I do in the meantime when I should be providing for him?

  • 54 SG September 22, 2014, 7:51 pm

    Jacking up IHT excessively would simply lead to huge and lucrative avoidance industry (and it’s a fallacy to suppose that loopholes can be permanently closed). Much better to tax property directly (you can’t hide buildings) and progressively by abandoning Council Tax bands and using a Zoopla-style technology to revalue once a year with no upper limit.

  • 55 oldthinker September 22, 2014, 9:20 pm

    @SG

    Ancestral wealth does not particularly have to be tied up in buildings. Much of it currently is, partially owing to the fact that there is no property tax in the UK – but this would change if such a tax were to be introduced.

  • 56 ermine September 22, 2014, 10:48 pm

    @Dragon I believe they look for 99+ years to issue a mortgage, though it was 75 years when my Dad bought them out. I’m not sure I understand the concept of a freehold flat inasmuch as the roof serves several floors?

    @TP Term life insurance. Worked for me and DxGF for the early years when there was much of the mortgage to run and serious consequences if I pegged it. For the exceptionally wealthy you can look at the trusts for bereaved minors if you wish to secure their private school funding et al.

    Term life insurance is exceptionally good value for young folk – ISTR my mortgage would have been entirely discharged on my death for the princely sum of £6.32 p.c.m. to Zurich which I viewed as exceptionally good value in my 30s and 40s. I’m happy to have never called on it, £1500 in total paid monthly for the peace of mind for 20 years ain’t bad value at all and I’m chuffed to be on the downside of a losing bet 🙂

  • 57 Tedious Pseudonym September 22, 2014, 10:53 pm

    … except in this hypothetical situation, there surely couldn’t be any life insurance, since you’re basically being stripped of your assets upon death.

    Otherwise everyone would have a “life insurance” policy which cost just more than your assets but the premium wasn’t payable except on a claim. Etc etc.

    But yes, I do have some, though fortunately in my case I have some business interests which would at least in part provide for my family should I kark it tomorrow.

  • 58 ermine September 22, 2014, 11:02 pm

    @TP – sigh term life insurance is specifically assured against the risk of the specific event to the beneficiaries so IHT does not apply, it’s not part of your estate…

    English law is perfectly aware of the issue of widows and orphans and that this is a special case compared to people who kick the bucket at more typical ages. Life really isn’t that cheap in a First World country. Any more special cases/straw men that need to be accounted for – it seems wiser folk than you and I are ahead of the game!

  • 59 Grand September 23, 2014, 2:45 pm

    This has made for a very thought provoking lunch hour 🙂

  • 60 Brendan September 23, 2014, 7:23 pm

    “It’s not perverse, he’s 3 months old. I can’t send him out to earn his own crust for at least 6 years, and what if I do in the meantime when I should be providing for him?”

    But look: your main objection to proposals to reduce the extent that a child’s wealth depends on the income of his parents is to reassert that, yes indeed, a child’s wealth depends upon the income of his parents.

  • 61 grey gym sock September 23, 2014, 9:09 pm

    oldthinker, you are spot on that what i’m proposing isn’t IHT, it’s a Capital Transfer Tax (CTT). this is what we used to have before it was abolished and replaced with IHT!

    CTT is not a tax on all gifts. you’d still have an unlimited exemption for gifts which are part of your regular spending, and about covered by your income. it’s a tax on giving away larger chunks of capital.

    1 justification would be that, if you’re giving away a lot of capital, you can’t need it very much. which comes back to the principle of raising the amount of tax required without hurting the tax payers more than necessary.

    another justification is that many people are using the 7-year rule as a way to avoid paying IHT. and the more money you have surplus to your needs, the easier it is to escape (or reduce) IHT by this means. so, in practice, IHT hits people with only £1m or so more heavily than people with many millions. CTT is fairer, because it hits everybody (with over £325k).

    now there are 2 ways to take advantage of hitting more people (or “broadening the tax base”, to put it more formally :)). you can collect more tax. or you can cut the % rate. wouldn’t CTT at 20% or 30% be fairer than IHT at 40%?

    SG, i agree that we should replace Council Tax with a tax based on a % of the property value with no upper limit. we could call it the Rates.

    ermine, i’m pretty sure that a joint tenancy doesn’t take the property out of the scope of IHT. i.e. if 1 of 2 unmarried joint tenants dies, half value of the property (less any outstanding mortgage) would count as part of their estate. this is perhaps an argument against reducing the IHT allowance to £100k. though if they take out term life insurance, the payout can (if it’s set up correctly) be outside the scope of IHT. and if they have children, a large term life insurance policy (more than enough to pay off the mortgage) is probably a good idea.

  • 62 Tedious Pseudonym September 23, 2014, 10:12 pm

    @Brendan The difference here is between an adult inheriting their parents’ wealth, and a child who would normally expect to be provided for should one be alive, suddenly being homeless and penniless because you want to take my money?

    Why wait until one is dead – you might as well just tax everyone 100% on income over say £25k and then at least it’s fair across the board?

  • 63 SemiPassive September 24, 2014, 7:33 am

    Here is an alternative take instead of blaming middle class boomers for nabbing all the wealth –

    http://www.telegraph.co.uk/men/thinking-man/11109845/Why-arent-the-British-middle-classes-staging-a-revolution.html

    Personally I think the inheritance tax threshold should be raised to £1,000,000, not cut to £100,000. Then you can hit the elite and leave the middle classes alone instead of double/triple taxing them.

  • 64 Tedious Pseudonym September 24, 2014, 7:43 am

    That is a pretty terrible article based on a fundamental misunderstanding of the deal in the first place (BC didn’t get Phones4U for £200m), and also ignoring the simple fact that noone “stole the jobs” of it’s workers, it’s reselling stuff that the people it’s reselling for would rather sell directly. Hard to argue with.

    And job wise, so many new network based mobile phone shops have sprung up, they’ve easily already been replaced.

  • 65 SemiPassive September 24, 2014, 8:41 am

    I agree its a flawed article, and I don’t see mobile phone reselling as a real business either. But the general crux of it, in my industry (IT) for example not only have real salaries not kept up with inflation, in fact even nominal salaries are barely higher than they were a decade ago.

    Things like rock bottom interest rates and tax credits (a ridiculous idea by Labour) have disguised the long slow decline for many families, but global wage abitrage, offshoring, and wealth concentration and accumulation by the 0.1% are not conspiracy theories.

  • 66 The Investor September 24, 2014, 10:18 am

    I agree its a flawed article, and I don’t see mobile phone reselling as a real business either. But the general crux of it, in my industry (IT) for example not only have real salaries not kept up with inflation, in fact even nominal salaries are barely higher than they were a decade ago.

    Many years ago (over 40) my father worked in the nascent IT departments of large industrial companies such as steelworks. His job was to figure out how the skilled workers applied their many years of training, experience, and nous to figuring out, for instance, how to adjust the machinery to create perfect and flat sheets of rolled steel as it cooled on coming out of a blast furnace.

    They had skills, but once a machine/computer could do it there was no competition. My father saw that, and thought it inevitable, but still found it somewhat heartbreaking and I think felt guilty for years afterwards.

    IT is no secret any more, the whole world is at it. Deflation for commodity IT should be going down now. (Obviously I wish the best for you as Monevator reader and hope you’re on the inside track etc).

    i.e. It was ever thus.

    Are salaries going down in biotechnology? In nano-tech research? In cloud/distributed server architecture? In social media UI development? I doubt it.

    This isn’t to disagree with your point about overall falling real incomes being a reality, which I agree is happening, though I think as you say there are many factors at play and it’s not just a rich-getting-richer story.

    Just a related observation. 🙂

  • 67 Jonathan October 5, 2014, 7:54 am

    This comments stream is like a huge rant by people who have no children, a minority of the adult population, and by young people, whose views on taxation of wealth will certainly change as they slowly convert their “human capital” into financial assets through time.

    There’s a good deal of poor-quality economics, apparently driven by ideological prejudices. The raving about “right-to-buy” is particularly weak, and worse, it happened so long ago that it’s irrelevant.

    I only came over to read these comments because The Investor linked to it from this week’s “Weekend Reading” column (http://monevator.com/weekend-reading-psst-pensions-pass-it-on/).

    I do hope he/she’s not taking it that seriously. Discussing politics (“what taxation system would be right?”) on the Internet is a great way to lose focus, and underachieve in one’s financial-, and life goals.

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