28 Feb 2014, 12:37pm
economy housing personal finance
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  • A cautionary housing tale from a quarter of a century ago

    It’s the last day of February 2014- a notable date for me, because twenty-five years ago I read this date on a form I signed to take out a 25-year mortgage as  I perpetrated the biggest personal finance error in my entire life. Of course my twenty-something self didn’t know that. It dwarfs any stock market losses I took in the dotcom bust, and it hit me earlier in my working life. I bought a house – a two-up-two down, at a four and a bit income multiple, with a 20% deposit, half of which was an interest-free loan from a credit card 1.

    Ten years later I ate nearly a 50% loss on that house. Some of it was poor house maintenance, but most of it was buying at the wrong time, in the Lawson boom of 1989. And that 50% loss is slightly offset by the rent I would have otherwise paid. So when Millennials hear that the older generation had it easy on housing etc etc – well, not all of us did. It’s a cautionary tale

    The UK housing market can be irrational for longer than you can stay solvent

    three years after I bought, paying a standard variable interest rate of 6.5%, I was paying a mortgage interest rate of 14%. I froze in that place in winter because I didn’t dare run the inefficient gas fires longer than I had to, and made friends with Sainsbury’s packets of mixed beans for cheap eating. However, I didn’t stop going out with pals drinking beers, so maybe hold on the violins 😉

    Colleagues at The Firm did highlight the macro picture, that Lawson was going to axe MIRAS for couples and that this was pushing up demand. But I was already running from high house prices in London, leaving the city of my birth and where I had grown up and started work. The crux point was when I was in the Broadcasting House bar, slowly drinking Fuller’s E.S.B. until the pain went away from all the people taking about how much their houses had gone up in value and all the yuppie consumer shit they were going to buy with the proceeds. All I had to look forward to was to get on the tube back to Television Centre, and then get on my bike and cycle up the A40 Westway to Park Royal, to go back to my bedsit with the salt round the outside so the black slugs didn’t invade and to shovel 50p pieces into the meter to heat up something in the Baby Belling pie heater. And I thought to myself there has to be a better way, and that was the day I realised that I was too poor to live in London. So I left.

    In running from that experience I ran into trouble here. I was lucky, that I kept my job, I have never defaulted on the mortgage. The 25 years I had signed to looked like an endless amount of time – I had only been on this earth for a few years more, and economically active for a fraction of the time. The way we do housing is really horrible in the UK – the expectation that people have of buying a house in their 20s – when life is changing, careers and life stories are changing – it’s nasty, but the ramping upwards of house prices to earnings pushes people to get a foot on the ladder when they are not yet experienced enough to understand a financial market or have experienced that markets have cycles. I started at a peak, because of my inexperience, I extrapolated the upswing that was all I had known into the future.

    There are three messages from this cautionary tale. One is that the cycle time of the housing market is shorter than a typical mortgage period, so as long as you don’t suffer a calamity that makes you a forced seller without rebuying 2 it comes out in the wash.I sold in the late 1990s, but immediately bought the same sort of asset with the proceeds and a bit more. I benefited from the upswing since, that compensated for my losses, so integrated over 25 years I am probably a slight beneficiary of the housing market.

    For what it’s worth, shares have done me much better. My shareholding net-worth – even evaluated at the low-water mark of the 2009 of half the value now is more than my housing net-worth. That’s because though I suffered losses at the beginning, they weren’t leveraged losses like a mortgage is, so I could start again with the learning and get ahead. Whereas housing losses set you into negative equity – you soullessly pour half your salary into a money pit and have nothing to show for it. And you can’t move until you have backfilled that hole.

    The second is that rent is not wasted money – not if the alternative is negative equity. Now that is wasted money – you pay into a black hole that stops you moving.

    Lastly, there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of that first house. All starting from a 5 times single salary house price multiple and a market crash. It looked as horrible to me then as it does to many people now, though I do acknowledge that middling jobs were better then than now.

    It doesn’t necessarily turn out as bad as it looked at the start. But try not to buy a house at high valuations. I have no idea if houses are valued high at the moment – if there is an economic boom in Britain as we crawl from the twisted wreckage of the financial crisis then perhaps they are at fair value.

    On the side of the young is that the Baby Boomers will start to become decrepit and die off in the coming couple of decades; this should release some family homes back onto the market. Against that there is increasing polarisation and jobs flow to London.

    I think the London market is a lost cause for the young and impoverished – in the end London will probably have to become an independent city state. As a mark of what’s gone on there even now I would have to commit nearly all my capital resources other than pension to buy my mother’s house in London – the aggregate value of my career doesn’t match the capital value of what my dad managed to buy forty years ago on a single blue-collar salary. But that’s London for you. It’s a different country.

    I don’t know why Britons love the housing market so much and yet are so fearful of the stock market. In my experience the bite of the housing market is far worse, and it’s responsible for far more human misery than the stock market. The housing market hurts poor Britons in its rapacious rents and dead hands on the lifetime earnings of people even if they own, whereas the stock market tends to hurt mainly the well-off. And yet housing is much-loved, whereas the stock market is considered a fickle mistress. There’s n’owt as queer as folk, as they say up north.

    Would the young Ermine have recognised his future self, playing the role of the Ancient Mariner and the young Ermine as the Wedding-Guest? Probably not…

    Notes:

    1. MBNA got all their money back, on time, and didn’t charge me a bean
    2. if you sell into negative equity you will usually not be able to buy again because of an excessive loan to value of > 100%

    “I don’t know why Britons love the housing market so much and yet are so fearful of the stock market.”

    I think the obvious answer here is lack of education/understanding. People love property because they can understand it. They can live right in the middle of it, be surrounded and protected by it. Plus they can watch it rocket in value without having to subscribe to the FT.

    On the other hand the average Joe doesn’t understand the basics such as compounding, yield, risk/return, annuities let alone TERs, EPS, P/Es etc. Due to the complete lack of financial education in our national curriculum most people don’t understand the basics about investing and pensions. We humans generally fear what we don’t understand.

    The ironic thing is that while we all love property and think we understand it, most home owners don’t understand compounding, interest rates, inflation and leverage. They are easy prey for estate agents and the dreaded mortgage brokers. I believe this lack of education is what makes our housing market here in the UK such a roller coaster of a game!

    I think Britons love the housing market as there are so many fewer intermediaries and as a result the market is more tangible, direct and honest. It helps that you can see the things, too.

    Estate agents take their cut from the seller and the government from the buyer but this is simple compared to the jargon, complex fees, hopelessly complicated products and plain misinformation around the investment market. And that’s just investing directly, let alone funds, funds of funds or other managed products like pensions.

    But I would say that, as I’ve been very lucky with property having lived and worked in the London area during a time of price growth and cheap finance.

    @Under The Money Tree I’ve had this rant before, but WTF? It’s not really the job of the schools to teach about money. That’s why humans have parents. In the 1960s, my parents, and children’s magazines, educated me as to what the joint stock company was for, how a mortgage worked, and the difference between shares and ITs including NAVs. This was a blue collar worker and a SAHM 😉 Britain is much, much, richer now and information incredibly easier to find, so why are Britain’s kids getting the short end of the stick so much?

    The tangible aspect is indeed one that I’ve heard many times – the angle ‘people have to live somewhere’. Mind you, they have to eat too, which would make the case for investing in farms and Tesco!

    @WestcountryEscapee, crikey, the process of buying and selling a house is one where I got to see some pretty ugly aspects of humanity, both in myself and others, so I’m not convinced by the honesty! Agreed on the tangibility, and of course as an investment a house does actually do something for you in kind.

    One of the worst aspects of housing though, is its mean-spiritedness as an investment. It waits to hurt people at the real low-points of life – redundancy and divorce. I took the sucker punch as a result of my own incompetence rather than those, but I’ve seen it hurt others at those low-water marks. Particularly in the early years of one’s working life, owning a house with a mortgage amps up one’s risk profile to 11 at the point where there is no financial cushion to soften the blow 🙁

    Today’s papers have articles mentioning that “one million house buyers have never seen a rate rise”. Yesterday’s papers said that the BoE was aiming to keep the base rate down to protect mortgage payers from a sudden spike.

    I sold the first house I owned back in 1989. In a small town near Cambridge. Cost (1992): £22,000. Sold (1989) for £48,000.

    Doubling my money sounds great, but it was only my third reaction. My first thought was “Bummer… an identical house sold a few months ago for £78,000”. My second thought was … “Jeez, I’m glad I didn’t buy that identical house a few months ago!”.

    Two or three workmates really got stuffed by forced sales at that time.

    A few years ago I had the “should I invest or should I pay off my mortgage” decision. Despite a few years of subsequent low interest rates, I’ve never regretted paying off the mortgage.

    @Steve – guess you mean ’82 for that first purchase? The bank of England inflation calculator seems to indicate we had some shocking inflation then, so the 1989 real price is 31200, but still a handsome ROI of 8% p.a. in real terms!

    That Nationwide CEO blog post is scary. Not only by the amount people will be hurt by a reversion to 2007 rates, but also

    the ingredients which gave rise to the housing crisis in the 1990s do not exist today

    That was the last war. It’s the set of ingredients for the 2015/16 housing crisis that frighten me!

    Errr. Yes. 1982. I was happy enough with my lot, but I’ve never forgotten what happened to others. We were out of the market 1989-2002 (partly through being abroad) and we thought long & hard before buying again.

    Thanks for the link to the Nationwide blog. I hadn’t managed to read the actual newspaper article because my monthly quota of free Telegraph pages was used up on my PC.

    My first reading of the blog post left me rather concerned by the juxtaposition of “mortgage increase of £230 per month” and “need to readjust household budgets”. I’m not sure the average person is ready for that sort of adjustment; so many people seem to live month-to-month.

    > I hadn’t managed to read the actual newspaper article because my monthly quota of free Telegraph pages was used up on my PC.
    I’m not quite sure how to say this, but there are non-onanistic uses for the ‘private browsing function’ 😉 It works a treat on the Torygraph, and helps you stay ahead a little bit more on the FT when you use the google search trick.

    That adjustment is what scares me. Both from the sheer amount of suffering that sort of thing would cause, and also the pole-axing of the consumer isn’t really what the UK economy needs – geographic diversification would be my friend there… And cash, to use the opportunities 😉

    Oh dear, I’ve just bought a house :/

    “non onanistic uses” 🙂

    I think something has to change, as a nation we’ll have to rethink the planning regulations – the old cry about us being a small island and that’s why prices are so high just isn’t true. Less than 10% of the UK is developed so there’s plenty of room to expand.

    The problem with property though is that it doesn’t work in a truly market efficient way – it’s continually being manipulated; from MIRAS back in the day, to Help to Buy now. If politicians would just leave the thing alone then it would stabilize.

    The other reason I suspect that it’s popular with people is they discount transaction costs, debt servicing, and inflation when doing the reckoning. “I bought it for 100k and sold it for 120k” = 20k profit in their minds.

    I think a big reason people think housing is ‘safe’ is simply that they don’t have the value available. With shares one can see the fluctuations by the second, but with housing, one only has a vague idea, even after one’s sold! (Totally agree about people not counting costs too though. On a related note, people always seem to forget that they could have put the cash for the deposit to work!)

    If people saw their equity change by about 25% over the course of a year due to the normal annual valuation cycle (n/a this year due to Gideot and chums) perhaps they might be a bit more cautious…

    Perhaps is also the vague feeling that the powers that be will do their very best to distort the entire economy to avoid you making a loss?

    The Mailygraph is right to limit the number of articles visible to the general public. It forces people to be selective and not get over exposed to the large amount of bile inside.

    What makes the housing market so difficult is it’s so unpredictable – I’m sure no-one saw the mortgage interest rate falls over the last 18 months coming, or HTB appearing out of nowhere. (I swear the Tories sit down and write as many things as possible that might make people vote for them down on a fag packet in a breakfast meeting, then announce one at random at lunchtime.)

    Buying could be the economically correct thing to do right now (in addition to all the non-economic benefits) or it could be a disaster. It’s pretty much impossible to sit down and make a sensible estimate of what will happen. e.g. If you had asked me 2 years ago about what would happen in London, I would have said it looked amazingly expensive and surely can’t go up further as the average person can’t afford a decent place to live. Since then, the (foreign owned) house I live in a small bit of has gone up in value by 262,000.

    @Reue – there is a positive message hidden in all the snarl – after all, despite a rotten start I did discharge that
    mortgage after 20 years, not 25 😉 It’s like most asset classes – stick with it for a couple of decades and you’ll be okay!

    @mistersquirrel it’s surprising how people discount the costs of owning a house. They tend to be lumpy, but I took as a guide when estimating for retirement the rough BTL landlord estimate of 1% of the value, and it works out roughly that. As for the politicians, well, I’ve had that rant too 😉 It’s top value for them to buy votes with other people’s money!

    @Greg

    Perhaps is also the vague feeling that the powers that be will do their very best to distort the entire economy to avoid you making a loss?

    The trouble with that is is forces the buyers without the asset class into a endless world of hurt because they take the loss, and these poor sods seem politically voiceless. I don’t have kids so it’s not my personal fight but nevertheless I think it’s just plain rude to keep buying votes at the expense of non-owners.

    Even as a home owner it doesn’t make me feel richer, and most people have an aim to go up the housing market for most of their lives so they are continually taking the shaft as the only voters who really benefit from rising house prices are the highly leveraged and the downsizers. Heck I’d rather my house sold for £10 if I could buy a farmhouse and 20 acres for £40, bring it on!

    Said The Ermine “Heck I’d rather my house sold for £10 if I could buy a farmhouse and 20 acres for £40, bring it on!” Yes, Bingo! For anyone seeking Financial Independance the biggest stumbling block is the cost of housing and therefore paying off the mortgage, no? So why is it heralded as great news everytime housing becomes more unaffordable than ever before? Soon we will need to work until 85 to pay off the debt, hurrah! Great news, energy prices are soaring! I think not. Rewinding, at the age of 25, unassisted and on an average salary, I bought a house in 1995 (while you Ermine were licking your wounds). A 3 bed victorian, nothing spectacular, in an ordinary part of Surrey. I now see it is worth 400k. How does a 25 year old do that now? I wish I still had that house, but alas breakups and life changes mean I have a fair chunk of cash stashed away but I rent. I work for the Firm in Sunbury, so I’m perfectly positioned in a completely unaffordable part of the UK. I’ve meticulously planned my escape (see Shawshank Redemption) and I’m gone in 10 years (55), if the property market crashes, then sooner. While I’ve wanted to buy, would I gamble my freedom on a property now? No chance. Smells to much like 1987 at the moment. Get that decision wrong and I’m stuck in The Firm til 65. Plan B, outsave houseprices outside London (thank you Shareplan/Save), buy cash and never have to worry about interest rates, crashes or Estate Agents again.

    @ Under The Money Tree

    What’s wrong with mortgage brokers?

    The whole of market broker we’ve used has found us a better rate that matched our requirements when we bought our first home and for our first remortgage with an improved LTV. This at no direct cost to ourselves…

    @Ermine Unfortunately I think adding personal finance to the national curriculum is the only way to re-educate the nation. I am part of a generation that is without the knowledge taught to you by your parents. I had a great upbringing but was taught nothing of finance until I hit university and to some extent learnt the hard way. Having learnt ‘on the job’ as it were, I’m now my families defacto IFA. I’d say 95% of people my age (mid thirties) in this country would fail a ‘personal finance’ GCSE is one existed. These 95% won’t be able to teach their kids what they don’t already know so I’m afraid my feeling is that schools provide the best place to get the the nation knowledgeable about personal finance again.

    @Luke I don’t want to taint a whole sector but my early experiences of mortgage brokers was one of hard sales, commission chasing and not necessarily having the customers best interests at heart. while not all are bad I think I think it’s fair to state that the entire US housing bubble that sparked the 2008 financial crisis was predicated on brokers/lenders giving people mortgages they clearly couldn’t afford.

    @Starla all the best for your escape plan. The old Sharesave will see you right this year to get a leg-up 😉

    It’s one of those double-whammys, isn’t it, that once you become FI you can lower your costs by moving somewhere cheaper and usually prettier – I mean Surrey is nice, but you can have nice far cheaper – if you don’t also need a job…

    @Luke one of these punks sold me an endowment + interest-only mortgage. Now my parents had already gone through the spiel that endowments were not right for me, as a single fellow without dependents, but I was suckered by the promise of the capital repayment component (the endowment) being likely to double or triple by the end of the term (this Feb). This was a hard sell, it was based on unrealistic appreciation rates that were already obviously overoptimistic to finance professionals by the late 1980s. And a single man with no dependents has not need for life insurance, ind if he had then The Firms pension scheme provided a perfectly good one, which they didn’t ask do you have any other life insurance. In short, these thieving barstewards knowingly used the young ermine’s unawareness of the effects of 25 years of inflation, and sold me a product that I’d have to be dead to enjoy much of the benefits. Shysters. And it looks like UTMT indicates the problem has only slightly improved in the intervening 25 years! Never trust salesmen – they’re in it for themselves, and they only stop lying when their mouth stops moving.

    @UTMT well, as the endowment showed, turning knowledge into wisdom is also a difficult thing 😉 Though I’m staggered as to what went wrong. I still remember the article in Look and Learn’s Treasure general knowledge magazine (strapline ‘finding out is fun’) how shares work, a bit about hte Stock Exchange and brokers and jobbers and that there was a difference between ordinary shares and preference shares. The same mag had what is still the clearest diagram of how a wet-roof central heating system works that I’ve ever seen – the knowledge served me well as a house owner. CH was a newfangled technology then.

    So why is the flag of general knowledge/education flying at half mast nowadays then? We have Google, we have MOOCs, we have personal finance websites and forums coming out of our ears, it should be so much easier than with the odd general knowledge kid’s mag and parents ready to answer why things are so.

    The issue with residence though is that it does not perform in a truly industry effective way – it’s constantly being manipulated; from MIRAS returning in the day, to Help to Buy now. If political figures would just keep the factor alone then it would strengthen.

    […] told it before in February when my original 25 year mortgage would have been due, but this one has added analysis […]

    […] was viciously bitten by British housing as a young man, and despite every man jack saying that BTL is the closest thing to a legal money printing press in […]

     

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