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Weekend reading: UK property makes fools of us all

Weekend reading

Good reads from around the Web.

According to the PricedOut campaign as quoted in The Guardian, it’s better for a first-time buyer to forgo Help To Buy, and instead rent and save for a larger deposit and a cheaper mortgage down the line:

The organisation compared the average monthly cost of renting with the cost of repaying an average mortgage around England and Wales and found that the interest rates on Help to Buy loans meant it was cheaper everywhere to rent than to buy.

In London, repaying a 95% loan at a rate of 4.99% cost £1,437 a month based on the price of a typical first home of £256,000, compared with average rents of £1,141.

The gap was smaller elsewhere, but even in the north-east where average rents were £533 a month, according to the latest LSL index figures, PricedOut said it was more expensive to service a 95% mortgage. It said to repay a loan on a property costing £104,000 would cost a first-time buyer £584 a month.

London has gone absolutely bananas. Again. I was chuckling at some investing literature the other day suggesting that a landlord look for properties that can be rented out for 1% of the purchase price. By that measure, my two and a half bed terrace in West London should rent for at least £5,000 a month!

In reality it costs me £1,600.

Who is the nutter here, me or my landlord? Property in the UK inflames passions and opinions, and there will be no shortage of people who’ll say he’s an idiot speculator at the top of the biggest bubble / Ponzi scheme in history.

I used to confidently say such stuff 9-10 years ago. Then prices doubled again.

Others, particularly the old, the traditional, and the closely acquainted with me, will point out renting gives you no asset at the end of 25 years. I’ve now been renting in London for over two decades, counting my student years1. This is no longer a purely theoretical matter.

A once in a thirty generation opportunity

The reality is that at today’s interest rates – the lowest for at least 300 years in the UK – my landlord is doing okay. In fact after the crazy price rises of the past two years in London, he’s doing far better than okay in capital terms.

As someone who prides himself on his investing nous, I can’t dismiss lightly the fact that my landlord has made at least £100,000 over the period, and I helped fund his bet.

On the other hand, if/when interest rates rise, the economics fall apart. As one Guardian columnist notes elsewhere in response to the PricedOut maths:

A £200,000 mortgage may, just, be affordable at around £1,200 a month on today’s rates. But it only needs the base rate to rise from 0.5% to 2.5% to push up repayments by £250 a month.

If rates were to rise to 4.5%, the homebuyer would be forking out £500 more a month, assuming he or she is on a mortgage that moves with the base rate.

The elephant lurking in the room in London and the South East is house price appreciation. That’s what stands ready to shit on sit on those who’d try to be too clever and sensible about what has long seemed a blatantly bonkers price boom.

It’s not always like this, nor everywhere. We have a PricedOut campaign in the UK because our house prices never properly fell. As things stand, our young people need either rich parents or extraordinarily lucky career paths (statistically speaking – it’s irrelevant that your nephew Barry got an internship at Goldman Sachs, there aren’t ten million of those to go around) in order to buy a decent family house fit for 25 years where the jobs are.

Or they need to emigrate. In the US, where property was at the epicentre of the 2008 crash, it’s a different story. Few people there now expect much more from their houses than that they keep up with inflation. If anything they’re too pessimistic, in my view.

He’s a mug, I’m a mug

My late 2011 bet to buy housebuilders instead of a new house here in London has paid off in pure return terms. The shares doubled and tripled in value in just two years. If I was a hedge fund manager, I’d be being interviewed for the Sunday supplements. Go me!

No so fast. It’s virtually impossible to keep up with the gearing benefit of a mortgage when prices are rising. The house I sit in – and rent – has gone up £100,000 in 18 months. It’s forecast to do so again over the next three years.

Making six-figures with the help of a bank is easy money of the highest order. I’ve known people who can trace six-figure returns from London property back to one decision in the late 1990s to get onto the ladder by sneakily amassing a deposit via some credit cards. They hadn’t saved much before and – bar the forced saving of a mortgage – they haven’t since.

It’s hard not to feel like dumb money in the face of that, whether you’re a 23-year old who is priced out, or a 40-year old who missed his chance because he thought he was smart enough to know better.

Prices in London are insanely high, and those who buy despite that keep making money.

UK property prices make fools of us all.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Claims you can save £250 or more from switching energy supplier using sites like MoneySuperMarket and uSwitch are exaggerated, according to The Guardian. It argues savings of £50-75 are more likely, because most of us already pay by direct debit and have already switched away from expensive single fuel contracts.

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.2

Passive investing

  • Swedroe: The definition of insanity applied to investing – CBS
  • Focus on a balanced portfolio, meditation, says famed hedgie – WSJ
  • Equal weighting not risk-free outperformance [nerdy]Index Universe

Active investing

  • How to invest like a Victorian trust [Scroll to nice graphic]Telegraph
  • Doug Kass: 10 laws of bubbles – TheStreet (via Abnormal Returns)
  • James Altucher: Who makes money in the stock market? – N.Y.O.
  • Small caps look pricey versus large caps (especially in US) – FT
  • Investors need to starve the hedge fund beast [Search result]FT

Other stuff worth reading

  • London house price map/tool [Interactive, scroll down]Natwest
  • When will base interest rates rise? – The Telegraph
  • How to invest a £150,000 inheritance3  [Search result]FT
  • Are you an extreme Christmas shopper? – Guardian
  • The big business of living forever – Slate
  • Why governments compete to devalue their currencies – The Economist
  • San Francisco makes Batkid’s dream come true [not investing]Slate

Book of the week: Deep Value Investing by Jeroen Bos is just out, so I’ve only read the sample chapters. But looking at his case studies, his small cap share picks seem uncannily similar to mine – I’m intrigued to see how much we think alike. One for us (foolhardy) active investors only, obviously.

Like these links? Subscribe to get them every week!

  1. In the mid-to-late 1990s London property was very cheap. My problem was I had no Bank of Mum and Dad, and also that I was a freelance. But no excuses, I could have bought somewhere cheap. I missed my chance []
  2. 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”.” []
  3. An interesting overview, but without exception they recommend active funds. You may want to substitute for broad, cheap passive funds. []

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{ 19 comments… add one }
  • 1 mrkoko November 16, 2013, 11:35 am

    Can I congratulate you fully on your website but especially this article?

    Ever since I started working, I’ve resisted the temptation to invest in property, no matter what my property obsessed friends and family might have said. Of course, the Greenspan/Bernanke put and tax deductibility of debt/interest has made me look very, very foolish over the past 2 decades. The only piece of financial wisdom I did adopt from my parent’s immigrant mentality of saving every single penny. No fancy cars/luxury holidays/ipad/smartphones/houses/clothes. Every single penny was invested into the public shares of companies/entrepreneurs in markets as diverse as the UK, US, Nordic countries, Russia, Africa, etc. Why did I do this? I witnessed and remembered the extremes of the Japanese equity/property bubble in the late 80s and also understood the power of compound interest early enough to realise it can a huge difference (assuming you can achieve such rates of return).

    I’d much rather depend on the intuitiveness/wisdom of a very good businessman than be reliant on the whims of a central banker. I avoid excess leverage; it kills with very little movement. Yesterday’s beneficiary/sufferer of the Japan bubble is today’s UK property owner/leveraged hedge fund manager betting with OPM. I wonder what would happen if every person in the country went into buy to let, especially with the govt’s buy-to-let scheme? Who would the landlord be letting to? Another landlord’s child or friend or relative who is also a buy to let investor?

    Do people not heed the lessons from the fall of the Irish property developers? Ireland’s richest men (worth billions abetted with leverage and cross leverage) reduced to grubbing less than a million dollars from the Barclay brothers while they salvage pennies in the Ukraine. Leverage and hubris kills you stone dead.

    Anyway, I’ll stop my diatribe. Your website is fabulous, your words are well-written, wise and well-intentioned and doing a service to all who read it. Keep up the good work.

  • 2 Jonathan Jones November 16, 2013, 11:36 am

    I have a co-worker who literally bought a boat. I jokingly said to her that with the price of housing in London, we’ll all be living in boats. It may not have been a joke after all.

  • 3 pkora November 16, 2013, 11:40 am

    Monevator needs to leave London, it is not doing your psychology any good. Leave the madness and move to cheaper, nicer area. The world is your oyster and you have the added advantage that you rent which makes moving a lot easier . Your real friends will keep in touch but with so many innovative communication methods at no cost, staying in touch has never been easier!

  • 4 L November 16, 2013, 12:12 pm

    “In London, repaying a 95% loan at a rate of 4.99% cost £1,437 a month based on the price of a typical first home of £256,000, compared with average rents of £1,141”

    This is poor economics. There is a strong assumption that the properties that are purchased by first time buyers are the same as the average rental property. I do not consider that assumption to be correct.

    Unfortunately, even though it is well intentioned, it is flawed debate such as this that has helped us into the current unsustainable situation.

    As always, an excellent read TI.

  • 5 Aidan November 16, 2013, 2:00 pm

    London prices are indeed pure madness not helped by recent government interference. But help-to-buy almost guarantees that low mortgage rates are here to stay for quite sometime; a significant rate increase will bankrupt half the nation…and the government.

    So after renting for a year I have recently bought a shared ownership resale property in London which gives me the perfect hedge. If property prices continue to go skyward I have locked in my rent proportion with just an annual RPI increment. If/when they fall – they have to at some point; right?! – I can buy further equity at a discount. But either way, I am not living under the whim of a private landlord wanting possession, rent increases, etc.

  • 6 SemiPassive November 16, 2013, 4:07 pm

    Its not just renting either, you feel like a mug for buying a house outside London instead of that “overpriced” flat in a ropey borough you could have bought in the early 2000s. The London market is detached even from property just inside or outside of the M25.
    I never particularly wanted to live in the middle of a city even though I work there, but in hindsight that combination of location & leverage would have given me the option to be mortgage free by now.

    Anyway looks like another 2 years of increases is all but guaranteed, although the jury is out after that.
    Personally I think a lot of boomer money is going to remain invested in property rather than the stockmarket. Any property crash will not leave shares untouched in any case.

    P.S. TI, no comments allowed on the 10 Good Reasons To Retire Early?

  • 7 BeatTheSeasons November 16, 2013, 4:41 pm

    Recently on Monevator there was a polemic about why your house is financial asset and an investment.

    On that score I’ve made a lot of money, yet I still have an astronomical mortgage that I can’t afford to pay off, and I also I don’t fancy moving up north to realise the value of my ‘investment’.

    The current valuation of the expensive house I bought some years ago is about as useful to me as the soaring black market value of human organs. I could get a lot more for one of my kidneys than a few years ago, but strangely enough I feel the need to hang onto them.

    If you’ve got the money, buy one house to live in and treat its value as imputed rent ad infinitum. Then go speculate on house prices if you feel like it after that, but don’t believe your own home (or lack of one) is a play on the residential property market.

  • 8 Ben November 16, 2013, 5:51 pm

    Totally agree with this. My take on UK house prices is:

    1. they will come down in real terms
    2. the correction may be nominal or just real but someone will lose
    3. high UK house prices are a disaster for all but the BTL brigade. People in the UK are playing to lose *less* than others playing the same game. In the end we all lose because pushing up the price of an essential is not wealth generation.

    The muddled thinking over the beneficial effect of rising house prices only goes to show how poorly maths and economics is taught in the UK.

  • 9 Andrew Williams November 16, 2013, 7:02 pm

    @BeatTheSeasons I’m not sure I understand what you are saying here. You start off talking about an investment and then finish by saying, “but don’t believe your own home (or lack of one) is a play on the residential property market”. Something can be an investment without being “a play on the residential property market” can’t it? Or have I misunderstood you here?

  • 10 Financial Samurai November 16, 2013, 7:11 pm

    I love real estate b/c I don’t see the price movements on a daily basis that will wig me out. I was thinking of buying more over the past 4 years, but didn’t want to deal with the hassle as online income took off.

    That’s great you got a double on your real estate stocks though! If you were bullish on real estate in 2011, what was your thought of not going in and actually buying your own property to live in?

    SF is like London… on fire now. I wonder when the party will end.

    Sam

  • 11 SG November 16, 2013, 7:28 pm

    The fact that my 4 bedroom house in inner London has increased in “value” 5-fold since I bought it in 1995 means nothing to me (I don’t want to move) and I really hope the market tanks at some point since I want my kids to be able to afford a mortgage eventually.

    What does matter to me is that I now pay about £400 pcm on my mortgage and CTax combined (and I also have to do maintenance, of course). This is where the value of “property as investment” lies.

  • 12 Financial Samurai November 16, 2013, 7:36 pm

    @SG – That’s because you only bought one property to live in. You are neutral property. In order to be LONG property, you need to own more than one.

    Monevator, despite his excellent stock picks, is SHORT property as a renter given he is a price taker.

    It’s just the way it is.

    Sam

  • 13 The Investor November 17, 2013, 11:04 am

    Thanks all for your comments.

    @mrkoko — I think the problem is that a bubble/extreme valuation seems bulletproof until right before it has popped. I think even the most ardent former bears on London property (e.g. myself) have or are close to throwing in the towel. Sure I can rationalise that foreign money and ultra low interest rates saved the market despite the crunch, but you start to believe something will always come along (I don’t doubt London’s position as a world City or as an employer par excellence) and that it’s like some mythical creature that can’t be killed. I took a similar route to you in 2003/4 when I decided not to buy property, and I have increased my net worth more than six-fold since then. But it’d have been easier to buy a flat in Clapham! 😉

    @Jonathan Jones — I’ve lived on a narrowboat for a short time, and loved it. If boats didn’t depreciate I’d probably have done this already, if only for the lifestyle. I may still when I have sufficient net worth to take a wasting asset on the chin! 🙂

    @pkora — I don’t disagree, and leaving London would make things easier. I’m have some interesting work on in London currently, but it could be kept via a once/twice weekly commute. I hate ‘losing’ though. The rational part of me says move to somewhere I have connections (e.g. lovely Spain!), buy cheap, and come back if it rolls over. On the other hand, London property has kept me humble, and repeatedly being whacked by it has made me a better (if poorer!) investor.

    @L — Cheers. One issue with property is there are a myriad ways to make the sums work (or seem to work) depending on what’s very often an emotional motivation (compared with shares, say, where people are *generally* ruled more by economics. By no means always. But people don’t grow up thinking about owning Barclays shares like their parents, etc).

    @Aidan — I’ve considered going down a similar route – buy somewhere very small and effectively average into a bigger position – and see the logic. You’ll want to be sure you have enough equity left in a fall to move up though, with shared ownership. Some people got ‘stuck’ in the mini-wobble in 08/09 due to shared ownership rules on who you could sell to.

    @SemiPassive — Another good perspective. This is why I wrote it “makes fools of us *all*”. The buyers look dumb for not understanding the crazy economics. The refuseniks look dumb for either getting those economics wrong or for simply missing out. The young who never had a chance look dumb because (wrongly) people always subconsciously think the have-nots have done something wrong. The rich property owning generations look like fools because they can’t see what they’ve done to the country (or they wring their hands and say they don’t like it for their kid’s sakes, but do nothing about it). Etc!

    The comments were accidentally disabled on the retire early post (it was a setting leftover from its original incarnation) and I only realised late afternoon — I had assumed nobody had anything to say until then! I decided to leave it as is at that point, as the day was almost done.

    @BeatTheSeasons — I too am a bit confused by your post when it comes to houses being an investment, though your point about it not being a particular liquid one is totally valid. I won’t rehash 2,000 words again! A house is an investment, irrespective of whether its owner has tactical reasons for calling it / treating as something else in their mental framework, bought it for emotional reasons, or doesn’t ‘fancy’ realizing it. You could sell tomorrow, have more cash you could invest in something else, and rent. Just like I could sell some shares and buy a house. End of story, as far as I’m concerned. 🙂 This is not to say as ever I don’t understand that/why people *treat* it differently.

    @Ben — That seems to be happening outside of London, to be fair. London and its close suburbs are the real outlier currently.

    @Andrew — Hi! Nothing to add but seemed rude not to include you in this reply-fest.

    @Financial Samurai — Hi, good to see you! Yes, I don’t know if you remember our debates about the market back in the day, but I was pretty confident about shares after the crash, and wrote multiple times it was a prime buying opportunity. I never felt that about London property — well, not since the mid-1990s when I had very little money or income.

    The trouble is I am a value investor at heart, if not a cheapskate.

    There was a period, say 2000 to 2004, when London property looked “fair value” (if grossly expensive) and I had some ability to buy, but I basically bottled it as I still thought it was too non-cheap to pump all my life savings into.

    I’ve read and enjoyed many of your real estate articles over the years, incidentally, and learned from them even though you’re in a market with different rules/regs and dynamics.

    My thinking with housebuilders versus new build in 2011 is sort of mentioned in the article linked to (which I see you’ve now read 🙂 ). In short: I was/am pretty confident the UK needs to build more houses, and in 2011 at least UK house prices were buying land cheap enough — and were priced cheap enough themselves — that I didn’t think they needed higher prices to thrive, they just needed transactions to pick up so they could get the volume. Some I thought could even do well in an environment of stagnant/slightly declining prices. (They were priced well below their book value etc).

    And as always with shares, if you buy without margin then your downside is capped to 100% of what you invest, and they’re very liquid and cheap to buy and get out of.

    In contrast, I would have needed to put most of my capital to buy a London house, the transaction costs would have been at least 5% and maybe higher, and at the time London prices hadn’t started recovering visibly, except in the ultra-prime ultra-central areas. At the same time, renting for me, while it’s getting old for me personally, was much cheaper in London in terms of the monthly cost compared to buying somewhere roughly equivalent, if you back out the lost capital gains in subsequent price rises. So buying a house seemed a more uncertain bet.

    Plus there were issues accessing finance at that point. It’s hard to remember it didn’t seem likely even that rates would stay so crazy low for so long.

    All in all it was a bad call, hands up, even if I try to persuade myself I was wrong for the right reasons. I’ve done very well in this bull market, but on current evidence I’d have done better buying the biggest London house I could afford with the largest debt I could get in say 2010 or even mid-2011.

    @SG — I have an overdue post I want to write about the true cost of home ownership. The trouble is it’s a hornet’s nest of particularities and so forth.

  • 14 PC November 17, 2013, 12:44 pm
  • 15 OldPro November 17, 2013, 1:38 pm

    From the Tim Hardford essay…

    “The housing bubble looks more serious. One measure of that is the gross rental yield, which – reckons property search engine Home.co.uk – is below 3 per cent in the prime west London postcodes, and below 5 per cent in much of the rest of the capital. Those yields look like a recipe for trouble when interest rates rise – which they will.

    But what do I know? I have been convinced that London’s housing is overvalued for at least a decade. The longer the boom continues, the more I doubt myself – even if the evidence of unsustainability just gets stronger.”

    … Monevator is Tim Hartford and I claim my £5.

  • 16 The Investor November 17, 2013, 3:37 pm

    @oldpro — Hah, more a case of great minds reaching the same (non) conclusion. 😉

    He’s a superb writer, that piece is almost poetry in places. I could imagine it being quoted in years to come.

  • 17 BeatTheSeasons November 17, 2013, 9:50 pm

    @ Andrew Williams @ The Investor

    Sorry to not be clear – my flippant human organs analogy is meant to show that the simple fact of taking control over a fundamental part of your life is more important than trying to put a financial value on it based on the latest market price.

    Your health, your friends, your family – you wouldn’t try to manage without them because you thought you could get them cheaper in a few years’ time.

    I like the way Sam puts it in #12 – you are only ‘long’ on residential property if you have more house than you need, one house is the neutral level, and no house means you’re shorting the market.

    I’m not sure which variety of property fool is taking the bigger risk.

  • 18 dearieme November 17, 2013, 11:28 pm

    Our house has one room more than we really need, and a bit of surplus garden space. We could look on those two as an investment/asset, though there’s no neat way to realise them except by selling a house that we really want to keep. We’ve already had an offer of “20% above a market valuation” and laughed it off.

  • 19 Cantab November 20, 2013, 1:43 am

    Bingo. This article exactly summarises the angst I’ve been feeling recently.

    The difference is that I’m in Cambridge, not London. Cambridge prices aren’t quite central London, but equivalent to some of the leafier boroughs.

    I’ve been staring at the numbers and, on pure financials, buying doesn’t make sense. Partly because FTB properties aren’t the same as rental properties – I share a house, which isn’t so easy to do when buying. So buying would be a step down the ladder in terms of housing standards.

    The mortgage interest alone would be almost double my current rent. Plus I’m making decent investment returns on the cash I’m saving. So a no-brainer, right? Except asking prices just keep going up (doubled in 10 years), and I’m up against the gearing of not having a mortgage.

    The other problem is one perhaps not faced by Londoners. I might want to move somewhere else, either for a change of scene or because that’s where the work is. In London you can do that just by picking a different tube line. In smaller places that means moving to a whole new city. If you move, you have a dilemma because if you buy there you might never be able to afford to move back again. So you can never move North, or abroad, without a risk of taking your iron out of the fire and missing the boat.

    It almost makes me want to max out the Help To Buy credit card and invest the rest – crazy but it seems rational. Last time I had this feeling was about 2006 when the rational thing seemed to be to rack up huge credit card debts and then default on them – everyone seemed to be at it, and look how that turned out.

    I can’t help feeling there’s a pricing apocalypse just around the corner. Except politically it would be dynamite, so the government would throw everything at it to prevent it. I hoped post-2007 we’d inflate ourselves out of the crisis (prices and mortgage balances static, value of £ goes down = real terms price reduction), but it didn’t happen. Maybe crazy-but-rational is here to stay?

    [ with apologies for mixed metaphors! ]

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