19 Jul 2016, 3:11pm
housing personal finance:
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  • Residential property investment success with Castle Trust

    Every Briton loves residential property, because ever since 1993, every man and his dog has been able to clean up with buying UK residential property. What’s not to like – no capital gains tax, banks lend you shedloads of money to buy an asset you otherwise couldn’t afford and no marked to market margin calls. Hell, they’ll even lend you money to buy other people’s houses, which is why we have middle class parents with buy to lets wringing their hands that their precious offspring can’t get a foot on the housing ladder and rent into their 30s.

    Three years ago Cameron decided to add fuel to this fire buy lending more money to people that couldn’t afford to buy houses, called help to buy. This pissed me off so much that I decided it was time to get in on the action. I didn’t want to buy a house for other people,  because I distrust the British property market more than Bernie Madoff because of what it did to me early in my working life, when I stupidly bought a house on five times my annual pay, albeit with a 20% deposit.

    It’s really hard to describe how much that buggers you up financially. Put it like this, my shareholding net worth is considerably more than my housing net worth. The latter I built up painstakingly from that early start across 20 years (until I discharged my mortgage). The shares I started in 2009 – okay so I was at the peak of my earning power and particularly keen to amassing capital, but nevertheless, accumulating housing wealth was a slow horrible grind for me, I was underwater for ten years.

    Since Cameron was giving out free money I decided that I may as well put my hand out for some of it, So I went with a Castle Trust Housa. I only went with £1000, because I was about to pass through a few years of lean times living off capital and investment returns, so most of my spare capital went into stock market investment. As a term lump investment with no income this was exactly what I didn’t need, but I did it for the principle. I didn’t incur any dealing costs or liquidation costs. and they have now sent me this letter

    housaOccasionally, in the three years since taking this out I’ve suggested it as something to consider for people saving for a house deposit bemoaning that the deposit gets overtaken by rising house prices. It makes sense to invest the deposit in something tracking the asset class, and while the Halifax house price index will never track the prices of the house you want to buy in a particular part of the country (particularly if it’s London), I was drawn to the Housa precisely because it was an index product.

    It was very illiquid – there was no secondary market for Housas, so if you needed the money within the three years (or five years) then you were simply SOL. There was obviously provider risk, Castle Trust used the Housa money to advance mortgages, a delightfully simple principle reminding me of the halcyon days before everything became financialised, you know, where real people clubbed together to help other real people raise the cash to buy a house. We used to call them building societies before they lost their soul to abandoned credit controls under Thatcherism, financial deregulation and greedy carpetbaggers.

    I wasn’t depriving some poor first-time buyer from buying a house 1 by front-running them and renting it back to them as a buy to let. So all in all an easy win. The 30% win is neither here nor there on this amount – perhaps I should have borrowed money to up my stake, but it is the first time I have managed an unequivocal profit on UK residential housing, unlike 99% of my fellow countrymen.

    It’s a shame this low-cost way of investing in the house price index has gone

    Castle Trust clearly want to get rid of this index product – they will only pay it out, not roll it over, and what they are offering now is nowhere near as attractive or even useful as a house price hedge. They are now offering basically fixed-rate corporate bonds on their mortgage business. The Housa was also secured on their business and I recall it made me uncomfortable at the time, but I was happy to take the haircut if the house price index fell, which would automatically ease the pressure on the company if people started defaulting. What made the Housa attractive was it had no carrying costs, purely the risk from the index and the provider risk, and since it was secured on the asset class underlying the index I felt okay about that. I won’t touch their alternatives.

    The problems for house buyers deposits are still that a sequence of Housa bonds or equivalent doesn’t really match how you want to use a deposit – you save over the years and then want to commit the entire deposit to the house purchase, at some unknown date.  You’d have to stop saving into housas three years before you buy, the flexibility is dire compared to a liquid alternative you can dripfeed into –

    Spread Betting

    You used to be able to spreadbet the Halifax house price index with IG Index, but the carrying cost of spreadbets is surprisingly high at 2.5%, pretty much the same long or short. You get the advantage of liquidity, unlike the Housa, but you pay that cost and a spread. On the other hand leverage is easy with spreadbetting. I don’t know if I were a young person trying to track deposit whether I would be tempted by leverage. The old head on my shoulders now looks at that and just seems despondency, desperate costs and massive tail risks, but on the other hand it would offer someone the chance to gear up if they feared prices escalating away from them.

    Part of the trouble with house prices is the cycles are slow, so all these annual costs can rack up and kill you because the underlying volatility and gains are too low. They look huge because a house is such a large purchase, Moneyweek had an interesting article on why spreadbetting sucks on house prices. It brings home just how much of a shame it is that Castle-Trust’s carry-cost-free alternative has gone.

    A young person will be more dynamic and risk-taking than me, and they have the advantage of having nothing to their name, so if their spreadbet goes titsup they have the option of walking away from their debts by declaring bankruptcy. I’m not advocating the idea, but faced with years of saving and falling behind, I can see an attraction is taking the risk if they are prepared to go through six tough years if prices fall. I considered walking away from massive negative equity in 1990 and going to work in Europe 2

    Low interest rates are no kindness to new house buyers

    It is a shame that we have no financial products that can help the young save in a deposit that at least tracks house prices. The very low interest rates now have decoupled savings from house prices with the pernicious rise of people talking about affordability – ie how much can you borrow at current interest rates assuming this will hold for the next 25 years. You amass equity very slowly at high income multiples, so you are exposed to the risk of negative equity for much longer in your working life than previous generations, and low inflation doesn’t help erode the real value of the principal. True, they had to suck up higher interest rates than now 3 but that has a silver lining – it incentivises overpaying, because that delivers a real win even on small amounts. The maths that make affordability good at low interest rates and high income multiples also make paying down the capital harder (because it’s a bigger proportion of your pay) and less worthwhile, you’re effectively renting the money from a bank, and much closer to the renting situation generally, even if you think of it as ‘owning’ the house.

    Even if we did have suitable financial products it’s no competition with buying a house on a mortgage, and you can’t live in your house price index bet either, though at least you don’t pay capital gains on it, should you have any.

    UK housing is a harsh mistress in a downturn

    …but she’s put on a lovely face for nigh on 25 years, tracking and soaking up the massive expansion of credit. So I’m inordinately chuffed with my £300 won from this most toxic of markets for me. True, Brexit seems to have done me several orders of magnitude more good in the numbers attached to the shareholdings I bought, which is just as well as I want some compensation for the damage my buccaneering countrymen have done to my financial future. And I am staying well out of the UK residential housing market in future – even if Castle Trust had offered me a roll-over I’d have walked away.

    Winter is coming to Britain. People are going to lose their jobs, and a good part of the reason for Brexit is that globalisation is making the lower part of the jobs market more and more crap, to the extent that middle-income families are getting 30% of their income from welfare. These are not people that will be able to afford to spend more and more of their non-income on housing, particularly if inflation and interest rates rise. If there’s one market I want out of, it’s UK residential housing, and now I’m out I’ll stay out until it has its Minsky moment.

    Notes:

    1. Castle Trust do lend to landlords too, so I could have been shafting the young by proxy
    2. I appreciate the poignance of that now, but heck, I was a Bremainer, so it wasn’t me that hurt this option for twentysomethings
    3. I paid 6.5% for most of my time and 15% just after buying the house (from a start of 7.5% in 1989)
    12 Jul 2016, 9:49am
    reflections:
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  • Down the rabbit hole

    This is gonzo politics and puzzlement. What goes for normal service will be resumed when the dizziness goes away. I’ve tried to be equally offensive to all sides here, because none of them comes out with great glory.

    I’m wondering if someone’s put LSD in the water supply. It’s less than a month since some of us including me discovered the limits of our filter bubbles. It’s like waking up covered in engineer’s blue with a cow looking at you strangely and surrounded by Swiss guys in lederhosen and thinking “Eh? I only started out last night with three bottles of cider in Croydon”. There’s only one thing to do – invoke the spirit of Yeats

    Turning and turning in the widening gyre
    The falcon cannot hear the falconer;
    Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,

    Vada a Bordo …Cazzo!

    Where’s Gregorio Falco when you need him? Been less than a month since the referendum and we’ve discovered that Cameron is made of the same stern stuff as Francesco Schettino. Having run the ship aground trying to appease the headbangers in his party that lacked the spine to join UKIP he starts calling for Mummy and abandons his post as the ship is taking on water. We then see a string of effective knifings and backstabbings which end up with the last woman standing allocated the role of top dog, while loathsome Leadsom who asserted having children uniquely qualified her for the top job exits stage left at the eleventh hour, pursued by a bear, the press pack and her own folly of denying the evidence of a tape recorder. Beware the hermeneutic rule about the bullshit before the but, dear lady, you parse such sentences by crossing it all out from the beginning until the t of but…

    Yes. I am sure Theresa will be really sad she doesn’t have children so I don’t want this to be ‘Andrea has children, Theresa hasn’t’ because I think that would be really horrible but genuinely I feel that being a mum means you have a very real stake in the future of our country, a tangible stake. She possibly has nieces, nephews, lots of people, but I have children who are going to have children who will directly be a part of what happens next.”

    1607_mummy2560

    Children – not prohibitive but not necessary and not sufficient to be PM, Andrea

    Reproduction has been done since time immemorial with unskilled labour, and anyway, that’s not why we’d hire you to run the country, though I admire the swift decision to exit the kitchen due to an excess of heat. Next time feel the bloody door for heat before you open it, huh?

    Back to the seminal question of the rabbit hole. Not only did I discover something about my fellow countrymen that I’d rather not have known, but okay, at least that’s opinions and like other parts of the anatomy we’ve all got one. It’s the succession of ghastly putative leaders in quick succession that did my head in:

    the effete narcissist BoJo, motto “think only of yourself” and let the devil take the hindmost

    cut down like a tree by the creepy wierdo Gove, who is apparently clever though he despises expertise in its many forms, frying pan, meet fire,

    Leadsom’s self-immolation would have been entertaining if it hadn’t been for the real possibility of her trying to steer the ship off the rocks, presumably into a watery grave because she mistakes enthusiasm for ability. After all, Angela Merkel is child-free and appears to be a competent head of state, though perhaps not a competent head of the EU finance department… more »

    1 Jul 2016, 12:18pm
    economy personal finance:
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  • Those stock market rises you’re seeing ain’t real, guys

    I am surprised at the nonchalance in the UK personal finance scene about the fall in the pound as a result of the Brexit vote. I am not making a long-term prognosis about whether or not Brexit is a good thing, but what is incontrovertible is that it has led to a sudden drop in the pound relative to other currencies. To avoid the vicissitudes of other countries’ fortunes I am using IMF Special Drawing Rights to compare the pound with. Let’s have a definition

    The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.

    Since the SDRs include the pound, a fall in the pound slightly devalues the SDRs, so the picture looks slightly better than it really is for a drop in the pound 😉 If you don’t trust those cheese-eating varmints at the IMF you can see the same effect in the good ole United States Dollar down below.

    A fall in the pound relative to other currencies makes us poorer than the rest of the world. We have to exchange more pounds for foreign goods – these foreign goods include most of the food we eat and the fuel we heat our homes with and put in our cars, it’s not academic. Because of lags in the distribution of goods this shows up as higher prices over time, typically over a year. I was a Remain voter so my view is that this change is a strategic impairment of the pound. This is my opinion – it is perfectly possible that the pound will rise over the coming year as the myriad delights of Brexit make themselves manifest in a cornucopia of joy. In that case my thesis is entirely wrong, and it will all come good. If you believe, nay, if you know that to be the case then save yourself the trouble and stop reading this pusillanimous piffle right now.

    Let’s have a fact check – has Brexit made the pound fall?

    1607_xdrytd

    how many IMF SDRs (ticker XDR) for a pound

    I think that’s a yes, so far. Probably about 10% this year. It’s not the only time, we all got a hell of a lot poorer following the financial crisis. Stands to reason, we make jack shit 1 and sell financial services, and the GFC was, well, a global financial crisis. And that’s what most of the services are, I guess.

    We don't really make anything any more. Source is linked to image (fig 8)

    We don’t really make anything any more. Data source is linked to image (fig 8)

    So we took it straight between the eyes

    the 10 year story

    the 10 year story

    Does it matter?

    Well, Britain imports most of its food and fuel, while we focus on being clever whizzes at financial services, Ricardian advantage to the fore, eh. So you get to pay more for that food and fuel compared to people in other countries. However, there have been deflationary effects on these – the oil price has dropped since the GFC for instance. So let’s narrow this to does it matter to investors?

    Well, yeah. Let’s take a look at the price of VWRL in pounds. Hmm, that’s not so bad, it actually went up after Brexit. I managed to buy some in the confusion, so I am feeling chipper, look at me, ain’t I clever?

    VWRL in the GBP I have got

    VWRL in the GBP I have got

    Now if I were an American and had done that after the initial drop, I would be feeling different. Not bad, but no turbo boosters from the falling pound.

    VWRL in the USD I haven't got

    VWRL in the USD I haven’t got

    So the fall in the pound has made foreign assets dearer for me compared to if I were not buying with pounds. While that makes me think whoopee-do when I look at my ISA screen and I think hey, I am a fantastic investor. Not only did I stay the course through Brexit and even buy, I am up on the deal because all the numbers are going up, it also means something else.

    I have lost my compass

    I have lost my main navigational instrument, and my ISA allowance has just fallen by 10% in real terms compared to the rest of the world. So have my tax allowances, and for those rich enough to worry about such things, so has your Lifetime allowance.

    Now one of the cogent arguments against this mattering is

    Some commentators seem to think that there’s both a perfect level for sterling and that they know what it is. I didn’t hear wailing when sterling fell from over $1.70 in 2014 to under $1.50 in 2015. If it ends up at c$1.40 after the current turmoil, so what? No need to sacrifice our first born to Cthulhu just yet.

    Well, I was wailing earlier in the year 😉 There is something up with me, I am much more nervous about the pound than most other people. It scared me in 2009 as I was shovelling money into foreign assets in my AVCs while Mervyn King was printing money and devaluing the pound. So let’s take a butcher’s hook at the GBP against USD (unfortunately I couldn’t find one for IMF SDRs going out that far)

    GBP against USD

    GBP against USD

    This is not a continuous story of success, or even random noise against a mean, and it’s a headwind against UK investment – even against the Euro we are 20% down over the same period. If I’d held exactly the same portfolio as an American investor over those 12 years, I would pat myself on the back because my numbers on my screen would have risen 40% up on his. And I would be lying to myself. The truth lies somewhere in between, and we normally just don’t see that.

    So I’m not saying I know what the perfect level of sterling is. Devaluation of the currency is how governments charge us for the taxes we aren’t prepared to pay for the services we demand, though this last hit can’t be blamed on the government. So while I don’t know what the level should be, I do know that it’s headed in the wrong direction, has been for years, and I’m getting poorer relative to the rest of the world if I hold cash in GBP. We will notice that in higher inflation in the years to come, particularly if the oil price continues to rise in USD. Of course Donald Trump may help us with that in November, though I suspect we may have other problems then.

    It is true that long term adjustments to exchange rates are A Good Thing. It allowed the Greeks to pay themselves more and more and feel good about that while the Drachma depreciated so tourists could still afford to go there and their rice filled vine leaves were cheaper in British supermarkets in Pounds. And then they joined the Euro. Basically floating exchange rates allow you to be lazy bastards collectively relative to the rest of the world and get away with it. If somebody asks you to take a pay cut of 10% there’s hell to pay and rioting on the streets. If you get the same pay and you currency drops by 10% then there’s the same fiscal result but no rioting. Stopping that happening is the original sin behind the Euro, but that’s a fight for a different day. I am still of the opinion that the Euro will blow one day, and we may be glad of our Brexiteering spirit as blood and guts rain down in the aftermath.

    Those stock market rises you’re seeing ain’t real, guys

    And being less productive is what we have all just voted for, but I am surprised at the simplicity of UK investors so being chuffed at their portfolios going up. Now of course that’s a win on having sat on the cash, or worse still, having sold and then rebuying, but do the thought experiment. Say you bought your portfolio with pounds the night of the Referendum. For some reason it bounces, so you issue the same purchase order now. And it’s dearer, so you get to pay more money for the same portfolio. That is Not a Good Thing. When that happens to the price of food, petrol, Starbucks lattes, wine and German cars that won’t be a good thing either.

    Which is why I wince when people celebrate on the rise in the stock market. It’s not real. Indeed, my portfolio is the highest it’s even been. My pension will be worth less, the cash I hold is worth less, yes I am richer in the ISA but poorer is so many other areas. Oh and I am stuck on an island with these guys.

    1607_stuck

    Deep joy. I’m putting a hold on the champagne.

    Notes:

    1. we actually manufacture more in real terms value than we did in the heyday of manufacturing in the 1970s, but do it with far fewer people
     
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