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)
     
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