13 Feb 2011, 4:48pm
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  • The Road Less Travelled – A Better Way to Buy A House

    I read M Scott Peck’s The Road Less Travelled a few years ago. Like any powerful message, it can easily be distorted if received by someone not ready for the signal. If you are of a Calvinist worldview that work is good for you then you may find confirmation of your world-view in the “life is difficult” opener of the first chapter, Discipline. You’re only looking at part of the story there, but you have to get further into the book to find that out ;)

    In particular, he speaks for the virtues of grit and determination to achieve anything, to wit

    • delaying gratification – valuing future gains sometimes at the cost of present comfort
    • Accepting responsibility for one’s own decisions

    I was reminded of this book when I read Monevator’s guest post from Tejvan Pettinger titled “Reasons to buy a house instead of renting“. Now in my view, at the moment there aren’t any reasons to buy a house instead of renting, it’s one of those things I learned by doing it in 1989 at a similar time on the cusp of a recession.

    Mark Twain said

    A man who carries a cat by the tail learns something he can learn in no other way

    So it is with buying a house at a time like this…

    Way back in 1988 I was in the Broadcasting House BBC bar at lunchtime, sinking a few beers as one did at the time of the liquid lunch to send off a departing colleague. I was a lonely grunt engineer, surrounded by beautiful people, all talking about one damn thing, which was how much their blasted houses had increased in value, or their friends had made on the sale of theirs.

    I slowly drank myself to a stupor, trying to forget that at the end of the day I was going to get on my bike and cycle along the Western Avenue to Ealing, where I had a crummy bedsit with a electricity meter that took 50p pieces and I needed to get some salt to put round the perimeter to keep the shiny black slugs from invading the room.

    What is it with rented accommodation and black slugs?  I encountered similar blighters in someone’s rented room on the first floor in Ipswich. Do landlords install them to stop their tenants getting too comfy I wonder?

    Anyway, I managed to avoid standing up in the bar and hollering “STFU you smug lot, I am on an okay wedge working for this firm and I have no hope of buying a house in this damned city of my birth because of sleazeballs like you making a mint out of my misery”.

    The modern equivalent of that is to get on pricedout and housepricecrash and blame the baby boomers for it all. Plus ça change, plus c’est la même chose. I felt just the same pain, but I couldn’t yell it out to loads of people on the internet. And I’d have queered my pitch with the girls, though I probably didn’t improve my case on that front by sinking five pints of E.S.B. so that at least if the situation didn’t look any better it felt less bad.

    There’s actually a positive takeaway for this for the priced-out generation. Every young generation is “priced out” in their twenties, because the greybeards have all the money. How did the greybeards get it? The same way as I did – working for three decades! Despite manful attempts to spend it on holidays, booze and toys some of it stuck around ;)

    When I got home I resolved to tackle the situation. I could either try to find work with Goldman Sachs to get the pad I wanted (I fancied a cool flat somewhere in Bloomsbury, please) or I could get the hell out of London and find somewhere I could afford on the sort of job I could get with my skills. I had spent all my energy railing against the unfairness of it all, and only when I had independently discovered what M Scott Peck had to say about taking responsibility could I find resolution to the problem. The next year I was in a different job, in a different part of the country, and stupidly putting down money on a house at the peak of the Lawson boom. Less than 20 years later, I had paid off the mortgage on the house I bought after that, despite nursing a shocking loss on the first house.

    A Different Way to Buy a House

    What I found so delightful about “Reasons to buy a house instead of renting” was that Monevator himself pole-axed the argument, with a single sentence in the comments outlining a different way to buy a house – the road not travelled.

    I followed the traditional path, buy a house in my late twenties, spend the next 20 years paying for it. I was lucky to stay in the same job and location for 20 years, that sort of job is becoming less common now.  There’s another way.

    What you are doing in taking out a mortgage is gradually buying a capital asset, that eventually by the time you retire should be paying your living costs for you. I don’t pay rent, and I don’t pay a mortgage any more. There are some parasitic housing-related costs associated with wear and tear that I do have to eat, but they pale into insignificance compared to rent or a mortgage.

    The trouble with a house is that it is an illiquid asset, if you have to move for a new job you have to hope you can sell your house, or get stuck with the headache of being an amateur landlord.

    What about the idea of pumping up your ISA and using the income from that to pay your rent? You get two things there, one is you build up a capital asset that roughly goes in line with house prices (house prices are usually high in booms and take a hit in recessions). You could use that to buy a house. The second is that once you have a capital asset enough to buy the typical house you would be able to afford on your salary, the income from those shareholdings probably makes a decent attempt at paying your rent.

    I was in my late forties when I paid the last instalment on my mortgage. Monevator, by contrast, is out there in front 10 years ahead of me

    As it is I’m in my late 30s with a portfolio big enough to buy a flat in London outright

    Jammy b***d, good for him! Now there are significant differences – he is more entrepreneurial that I am, and I would imagine on what works out to be a better income – that is one of the advantages of working for yourself whereas I took the conservative and at the time safe approach of having an employer hedge all the business risks for me. Look at that difference in timescale. I did pretty well, discharging a 25 year mortgage in 20 years including one house upgrade, whereas Monevator has set himself up to be able to buy if he wished a decade earlier in his life, and in London, where he’s competing wit hthe financial whizz-kids and foreign shipping magnates inflating house prices.

    There is much to be said for the investment asset approach rather than the bricks and mortar approach. With the latter, you are exposed for the full duration of the mortgage to losing your job and possibly having to sell up into negative equity or losing the house. Obviously with investments you can screw up royally or suffer a Great Depression, but provided you play safe and keep your wits about you then you won’t suffer a forced sale where your assets are marked to market.

    Once you have the money to buy a house, and once you are old enough to retire/no longer need a job to survive financially, you can consider buying at a time of your convenience. For a house is a real asset, it is not purely a financial asset. That means it does something for you – it keeps the rain off your head and means you aren’t beholden to somebody else’s whim for accommodation. There are great advantages to non-financial assets in times of trouble, like the potential end of the eternal growth that industrial civilisation is predicated on.

    They hold some of their value, unlike paper assets which can get rendered down to toilet paper by inflation or monetary disasters. But because of its illiquidity, if you have enough money to buy a house cash using the value of an investment portfolio, you are much better placed to tackle the modern world of insecure work and needing to move than you are as a mortgage holder.

    I’m in awe of the road less travelled. It wouldn’t have worked for me (and many others) because I was an unsophisticated investor well into my thirties, so I wouldn’t have been able to build capital like Monevator.

    My sophistication now is hardly much better, but my results are better, because I have learned so sit on my hands and do not churn my portfolio, and seek income which screens some of the wilder excesses (it’s not as simple as chasing yield which often drives you to excesses).

    So the road less travelled is less travelled for good reason. It is hard, and it needs self-discipline and keeping one’s wits about you. Most people do not measure up to the requirements, so the conventional way of exposing themselves to the risk of negative equity and taking twenty or thirty years to pay down a mortgage is perhaps right.

    But as M Scott Peck would be only too happy to remind us, there is value in the discipline of gaining the understanding of another way, and developing the skill to do it. Buying young and subjecting yourself to the whims of an increasingly dysfunctional workplace for two decades is not the only way. M Scott Peck would have the hordes of pricedout et al take heed, and perhaps look for the road not travelled. They could take their capital asset with them as they travel the country or continents seeking work. It is hard, because you have to forego the iFads and knuckle down to saving, a discipline which is forced on many in their thirties by the need to pay the mortgage or lose the house.

    So I tip my hat to the intrepid travellers on the lonely road less travelled It is hard, but it looks like it may serve some of them well, and they deserve to get to the destination quicker.

    Guv,
    Monevator’s providing loads of grist for our writing mill – inflation for me, mortgage for you (and me too, for I was thinking of writing something along these lines myself – you’ve got loads of other posts to back up your other arguments.) Reads nicely.

    I’ve liked your “Priced Out” post in the past and showed it to DW wrily. I’m stuck with a similar situation (and yes, me parents/in-laws tried to warn me about it too!) that was until recently bleeding me 14%!

    I too advice against going for mortgage to anyone who cares to ask my opinion, as job volatility is much more higher here, but people point to my own (underwater) mortgage as their argument against my advice :-(. Fine, you’ll live and learn, I say to them. But here’s in advance from me: “I told you so!”.

    Usually the IT crowd (which is the prime target for the real-estate conmen) hang out around those IT enclaves (for easier job-hopping without losing shirt on the poperty) like Gurgaon, Hyderabad, Bangalore, thereby inflating prices in those cities artificially + substantially and putting heavy load on infrastructure and utilities: matchbox sized 10-12 apartments where a single house used to stand, and as you can imagine, road, water, sewage, garbage are all pretty stretched!

    P.S: Is the mortgage repayment amount usually lesser than the monthly rent in the UK?

    Here’s what I posed in Monevator, verbatim:

    I don’t know how relevant an Indian perspective on this would be, but let me try to put things down.

    1. Usually there’s loads of “administrative” fees that go with registering the house, etc. This is not covered as part of the bank loan here. It’s usually 10% of the cost of the house/apartment that one has to shell out of own pocket. And there’s no way you can “recover” this cost from the next sucker you’re trying to offload the house!
    2. Granted, there’s a interesting case made for exhorbitant rents, but what the monthly repayment on a mortgage? In India (regardless of the location…location…), renting is about 1/3rd the price of a monthly mortgage installment for a similar dwelling. So, it is very stupid to go for a no-down-payment loan, while you could be socking away 2/3rds of a “potential” mortgage interest towards down-payment for a few years.
    3. There’s also the concept of fixed/floating interest rates here, and somehow the bankers manage to con(vince) you to sign for “floating” with the carrot that interest rates will fall and your rate will follow that trend instead of a “fixed rate”. When the rates do fall however, the bank will not lower it automatically. It is your “responsibility” to go to the bank and pay them another round of “admin fees” to bring it (sort of) on par with prevailing rates. The experience is enough to kill your faith in humanity….thrice! In a nutshell, either way you choose, the system is set up to bleed you dry.
    4. There used to be a provision earlier, that you can chose to pay the money back earlier than the 20-25 year period. Lots of IT boom and saved per-diems and Rupee vs. others conversions later, banks now penalise early repayment since late 2007 (peak-IT boom). It is just eye-watering to see the money leave the account month after month, and watch your rate of interest climb up every two months… Usury must be experienced before it can be commented upon!

    In summary,
    1. “house prices will always go up” is a myth. QED Hong Kong, USA…
    2. “Timing the stock market/property bubble” to rake in the money? Who do we think we are kidding, Mr. Hitler?
    3. Nothing beats the old logic of saving up for a chunk of your property’s value before committing to the mortgage……..Ever!. My father didn’t have a PhD, but he got that one figured right! And I didn’t!
    4. This “Home ownership” dream is way too overrated around the world (Somewhere I read that “Debt incumbent homeowners don’t go on strike”! Ha!) So much for owning and living the dream! Yes, there’s a case for buying your home by the time you retire (my father did exactly that), but signing away the rest of your life starting in the early 20s for a “no-down-payment” mortgage is just silly.

    That’s my view.
    —-

    @Surio if there’s one takeaway from my experience it is that if you stick at it (and can keep up the repayments) you will come good in the end, but unfortunately you are in middle age by then ;)

    You have the advantage that India has a relatively high rate of inflation, which is busy killing your debt. My Dad paid his mortgage off earlier than me, but he had the advantage of 26% inflation on his side in 1979.

    In the UK under normal circumstances rent is roughly equivalent to a mortgage. A mortgage is much cheaper at the moment because of the low-interest-rate policy of the Bank of England, but under normal circumstances market forces appear to shift things to make renting only a little bit cheaper than a standard variable rate mortgage.

    Waiting patiently and praying the market doesn’t hit disaster until late May, I am gleefully relishing the burning of my mortgage. Right on the money, gotta get that grit and determination going and get this stuff paid off before you do anything else. I procrastinated a bit but I’m so close I can taste it. No mortgage, no rent, is the only place to be in these really uncertain times. I really believe the mega-crash is coming. It’s just a matter of time. Don’t get caught with your pants down with debt you probably won’t be able to pay !

    You missed out the Third Way:

    http://www.guardian.co.uk/money/blog/2011/feb/14/saving-house-deposit-first-time-buyers

    Very much appreciate the post and debate; this homeowner decided a few weeks back to stop plowing spare money into his ISA and to start paying down the mortgage… for better or worse.

    Ermine I agree with you that houses are overpriced. But what is the alternative? A lifetime of paying rent? How on earth are we gonna be able to afford to pay market rent in our old age?

    I rent too. But Im not comfortable with it. If you can afford to buy a reasonably priced house shouldnt you? At least then you arnt worried about homelessness in your old age?

    @Lemondy, once you have a mortgage paying it down is a [retty good solution – the only way you get a decent return on savings nowadays ;) The Grauniad’s Tabitha worked hard for her £166, no…

    @Dreamer, no argument that it makes sens to buy a reasonably priced house, it is more than they are unreasonable at the moment.

    Monevator showed there is another way. There’s nothing wrong with paying rent if you have a large ISA portfolio that covers your rent. In many ways you have greater flexibility, and this need not stop in old age – that is the beauty of passive income! Monevator got himself to being able to buy a flat in London, outright, should he shoose to do so, in his late thirties. I was in my forties by the time I paid off my mortgage, and though Monevator’s career arc is probably a little higher than mine, he hasn’t got a hugely greater income in real terms than I had at his age. Getting a decent share portfolio and using the proceeds to address on’t housing costs if a flexible alternative, it need discipline and courage to not lose one’s head in bear markets so it doesn’t suit everybody. But actually buying the house isn’t the only way to underwrite your housing costs. I didn’t realise that when I started down the mortgage route and probably wouldn’t have had the talent to make it work, but it can be done :)

    Ermine, Im sure that Monevator’s way is possible, but I’ll believe it when I see it, when Monevator has actually cashed in his shares and bought his house in London then I’ll tip my hat to him but not before.

    But it’s not either/or. Because I have never overpaid on it I am still paying a mortgage and I’ve been nursing investments for some time. I like the flexibility that gives me, even of it’s not necessarily the most efficient way.

    Hi ermine,
    I thought I had replied to your remark. Reading monevator today made me look you up, and I realised I hadn’t :-| Oops.

    I am aware of this inflation eroding the value, but actually, the bank keep raising the interest rates over the “floating” rates every 2 months, and unfortunately, I am in the floating category, which means I am getting my teeth kicked in in the entire deal. I am not sure what is the proportion of people that sign fixed vs. people with floating, but we have our own share of “green eyes” and I’ve seen more floating rates were checked on the application form while I was there. :-|

    @Surio,

    I feel your pain,I paid over 14% at one time. However, paying inflation +x% is not so much of a problem, because you have bought an appreciating (?) asset using leverage, and you are slowly paying down the capital, ie you are not paying inflation + x% on the whole value of the house for the whole duration of the loan.

    So there’s still hope – I have never been on a fixed rate mortgage. But you only get to see the jam in the last 10 years or so – it is the tragedy of home ownership that you get to eat most of the pain when you are young

    Thanks for continuing this debate here, and glad the post provoked some thoughts!

    Ironically, as I’ve mentioned on the comments on my own blog, I’m not convinced this is a great way to buy a house, personally, although it’s true it’s hard to beat the flexibility.

    But you miss out on the heavy lifting done by inflation and leverage.

    Also, there’s a big tax break of effectively renting a house of yourself (i.e. buying your own home).

    In contrast, as @Dreamer implies, actually converting my portfolio to a flat would be non-trivial. There would be substantial capital gains taxes, which in reality I can’t imagine I’d ever be happy to pay.

    So in practice I’ll almost certainly use a mortgage if I buy, although I’d certainly try to raise it against the portfolio income to keep down costs (but that’s not tax efficient either!) and then perhaps over-pay every year by timed tax disposals.

    I love ISAs so much that I’d be loathe to liquidate them too, so again that constrains the likelihood of directly turning equities into bricks and mortar.

    cheers!

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    I live in Toronto, it’s one of the biggest city (and expensive) in Canada. Right now, the average home runs about $350k (bottom) to a million dollars.

    I don’t see why people need a house (even with a family) unless they’re trying to settle pernamently. As for me, I would rent cheaply in an apartment, save enough money, then buy a cheap house in a small town and live the quaint life.

    If you’re single, rent. If you’re married, rent. If you got kids … move to the suburbs and buy a cookie cutter home for much less.

    Either that, or buy a condo.

    [...] if you had a parallel savings product for the capital. Often an endowment, but a S&S ISA is a good match too. If you save £10k a year in cash, after 25 years you would have enough to buy the average [...]

     

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