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)

    It is mind boggling what real estate multiples and affordability ratios are bandied about in Canada today.
    In our salad days my wife and I never went over a multiple of 3X family income to buy a home and in spite of 15% interest rates we were discharged from our debt in a bit over 10 years. Today multiples of 8-10 are not uncommon in Toronto and Vancouver, and 30 year mortgages are the norm.
    Our financial advisor talks about a Rule of 90. Take 90-your age and that is the % of your net worth that is advisable to have in real estate.
    We can’t quite get that low but we are in substantially better shape than most Canadian families who have adopted a single asset strategy for retirement financing. I hope they enjoy cat food for dinner.

    That rule of 90 is interesting, guess I should be 30-40% in RE. I’m probably light on that, though my networth will probably start to fall with age from now on, which will be a headwind.

    It’s scary, isn’t it, thinking of all that rising claim on the proceeds of people’s lifetime work being shovelled into the insatiable maw of financial institutions via the creeping leverage on house prices. Once upon a time we used to have regulations on the amount of credit for mortgages, and funnily enough house prices were stable-ish. Then this was lifted, and the slow drag upwards began.

    8-10 is wild. I’m not sure that the outer civilian parts of London is yet at 10* !

    Oxford is at 10*local income, bolstered by people commuting to the City and sucking money out. After 7 years of 0.5% base rate, few can remember real interest rates, and as the bubble continues, the number of “surely prices can’t go any higher” people has been winnowed out.

    I was that lemming in ’89, albeit at ‘only’ 5*. You can come back from 5*, but 10*?

    25 years ago as a new graduate I bought a 2 bed flat in Surbiton for £73k, with a £30k Endowment mortgage, ie 41% of the cost, my worst financial decision ever. I knew it was under-performing and had crippling fees, but I couldn’t face the hassle (and shameface) of cashing it in early. It matured last October, and paid £20.5k. With flats in the block now costing £335k, that could buy me 6% of a flat there now.

    @John B – ouch! Although in fairness, it was only designed to pay off the original mortgage principal

    I was only saved from a similar fate on my 41k endowment by getting so incensed that they kept on sending letters to the effect we are welshing on the deal I sent a stinking letter to the head honcho of Friends Provident, who eventually accepted they shouldn’t have sold a single man without dependants a life product and reinstated me to where I would have been on repayment. I took that cheque and paid down some of the mortgage principal with it, but left repayments the same. It didn’t help me much at the time, but I was grateful 10 years later!

    A colleague just bought a house with an £850 000 mortgage just before the referendum – so I ran their numbers out of curiousity – a professional couple earning ~£50 000/pa. each, 25 years – 3% variable interest rate sounds a reasonable assumption. [I couldn’t ask such personal details to know for sure] They’re already pushing 40, with 3 kids & globalisation/robots/eastern European hordes* eating our jobs. {*Sarcasm intended there, not an ethnic slur – in case it isn’t obvious}

    It’s just terrifying what people are signing up to, even if [as the brexiteers jubilantly assure the remoaners, the economy tanking is all scaremongering &] nothing negative happens ….. it all turns out all fluffy bunnies. All it takes is for one partner to lose their job even just for a few months, be seriously sick or divorce etc., for example & this financial house of cards would collapse.

    On closer gentle probing, my suspicions were justified, they didn’t really understand how mortgages work, the risks they were taking and therefore what they were signed up for. Now these are not stupid people, they are multi-degreed scientists, so if they can’t decipher a standard, modern, mortgage deal, what chance ordinary mortals?

    As an adult with a couple of decades of experience under my belt, degrees and a pretty good kicking from the University of Life so far, my heart still sinks whenever I have to do b(attle)usiness with these slick shysters in suits. I can’t help feeling as I meet their steely reptilian gaze and [if you can call pulling your lips back to reveal your teeth] smiles …..that they know they already have you on the horns of a dilemma if you’re there.

    What is worrying is the increasing financial pressure on the basic needs of life, we all need shelter, but if you escape the rip-off on mortgages, you get ripped-off on rent. Innovative alternatives are excluded by legal gatekeeping to keep the rentier economy running – if enough people had an alternative to exploitation, the economy would collapse, given its over-reliance on the housing merry-go-round.

    Wow. £100k coming in + 3 kids + £850k and in the second half of their working lives – I see hard times ahead 😉 Even in the good times it’s over half of one salary down the Swanee as it is. Still, you can’t have the kids sharing rooms these days, so a 4-bed it is then…

    I remember a few years back seeing a news clip of I think it was either the Malaysian or Indonesian dictator of the time talking about the changing world and he said ”Westerners are going to have to learn how to be poor again”. I thought back then ”You cheeky fk, easy for you to say while living in unimaginable opulence having fleeced your entire country/people for 2 decades”, but actually while rich [in at least a couple of ways coming from him] he was still right.

    People here don’t get that if you can buy your consumer tat for ever-decreasing amounts, there’s another price to pay – our jobs go to slave-labour countries for that equation to work. And while most people don’t give a sh*t on the ethical front with that, they don’t see that a job here has to die, for one there to be created – at some point then, you can’t buy all that plastic crap no matter how cheap it gets – so it’s self-defeating. The law of diminishing returns ……reality intrudes on the fantasy eventually. Karma.

    If you have even average intelligence, it’s hard to not be cynical today, I have an acquaintance in the ‘aid’ industry who told me straight that ‘aid’ is poor people in rich countries giving money to rich people in poor countries. I was born & raised in a third-world country, so frugality came hard-wired and I only know these things because I saw it. So I’m telling you now, the middle classes here are sleep-walking into genteel poverty right now; but still, I say nothing in my social circle, because nobody likes a bearer of bad news.

    Jacob from ERE is right, the best [only?] way to survive the coming storm is to be totally independent …..the good thing then is that the vast majority of the population have no idea & even if they got it, they’d refuse to accept the necessary changes to a mindlessly consuming, busy-work culture. [So the FI community will always be able to keep ahead of the mob] If I sound overly pessimistic and exaggerated, this guy has an excellent blog & more CV credibility than me –

    ‘A debt-addicted economy tends to use housing finance (as well as consumer credit) as a conduit for pouring more debt into the economy. This has resulted in bloated property values, which are socially distorting as well as detrimental in the sense that the property sector is a nil-return “capital sink”.’ https://surplusenergyeconomics.wordpress.com/

    He knew a thing or two, that dictator 🙁 And I’m not sure that it’s genteel poverty that they’re heading for, either/ The trouble with FI and being independent is a) total independence is miserable because we are a social species and b) FI is only as good as the financial system, which seems to be a large part of the problem.

    I’d never really though of property and the nil-return capital sink, but it is. I always wondered why we adjusted things so more and more of lifetime earnings is locked up in housing (that 10* earnings is a big part of a working life) rather than spending it on holidays and cocktails.

    When I worked at Unilever one of my favorite colleagues was the local IT helpdesk guy – smart, friendly, hands on, customer focused – and no matter how screwed up your PC was he always gave you confidence that it would be OK and he could fix it. He went on to manage some major IT upgrade projects in the company.
    I try to imitate his approach in any “free” IT I do for the locals. He was the best I ever worked with.
    Caught up with him on LinkedIn recently. Apparently Unilever outsourced his job to a System Integrator who do the work remotely from Asia. Today he works as a Mortgage Broker flogging debt to new Canadians mostly from India.
    Another sign that the Apocolypse is not far off.

    > Apparently Unilever outsourced his job to a System Integrator who do the work remotely from Asia.

    That is rough, though I guess that sort of thing is indirectly why I pulled the great big get me out of here ejector handle. It’s the cannibalisation of decent professional employment in the West. Sure, if you are entrepreneurial and you’re good you can do the contracting thing and make hay in a way you couldn’t before, but not all of us want that sort of fight, because we work to live, not live to work…

    Housing… Also an issue for me in Zurich / CH. 10x income is deemed normal here. Mortgage rules are rather more stringent here, without at least 20% own capital you will not get a mortgage.
    Currently in the process of downgrading, and wondering whether to rent out the old mortgage-free house, or just sell it an take the gains from the last 15 years of price increases. We do have considersable capital gain taxes on house sales though.
    A big issue here is old people, on rather small budgets, unable to pay the imputed rental value tax on their properties, once bought for small money, but now worth huge amounts, and taxed accordingly. Might be an issue for me later on, but I am flexible enough to move country if need be.

    Perhaps I am out of touch with those 10* multiples. I bought and paid down the vast majority of the capital on my house without the help of a second income; maybe it skewed my view on affordability. Interesting on the imputed rental value – there’s definitely an incentive of people to downsize after the kids have flown the nest! And CGT on capgains – those Swiss are sensible in these things as opposed to the UK madhouse 😉

    I have just aborted a property purchase, a rural property with enough land to have a go at being sensibly self sufficient which is my goal as I migrate from employment to retirement. The reason I aborted was that the surveyor valued the property a good 15% lower than the ‘guide price’. I think I will wait and see, I think the probability of prices reducing are far higher than them rising over the next couple of years.

    I’m of the same view on the future, although property _and_ land is a law unto itself, there’s so little of it about at reasonable prices, or even only slightly outrageous prices. I guess most has been garden-grabbed

    Nice growth on that Castle Trust Housa.

    I still think there’s some life left in investing in property and have just dipped my toe into property crowdfunding with Property Moose. It’s money tied up for 2-3 years but there will be a bit of income from it.

    heh – of all the investments I carried over the last three years that one troubled me the most, because I didn’t want ot be slaughtered yet again. I’m glad to be out of UK res now. That’s for people made of sterner stuff than me 😉

    @ermine — Why do you keep saying your out of UK residential housing? Did I miss a post where you sold your Principle Place of Residence? 🙂

    Or is your house not only in your eyes not an investment — it’s also not even a house?!

    Confused, of London

    (Thanks for the links. Just keeping you awake old sport. 😉 )

    hehe – I am out of housing from an investment POV. Ghastly asset class and it still scares the crap out of me. I know, we’ve had that debate before and I still don’t list it as part of my networth. ‘Cos I’m ornery like that, although I accept that from some perspective maybe not rational.

    I’m sure @ermine would point out it’s not so easy (or desirable!) to capitalise on any gains he makes on his house.

    Housing in the south east has reached the point for me where I don’t have a clue if it’s going to burst like a bubble or continue rising to infinity. But the sheer amount of leveraged exposure to a single house on a single street in a single city just to buy a house leaves me terrified about the possible downsides. My aim is to grab as much cash/equities while I’m in the south east, and then get the hell out of dodge and buy something small up north, where a property crash wouldn’t completely up end my world. I don’t want to go anywhere near this madness, even if it it means I may miss out of fantastic gains.

    I did start dumping money into one of Vanguard’s global commercial property trackers, because if property values do skyrocket to infinity, it’s not going to be a purely British phenomenon. It’s also far less risky than a single, illiquid pile of bricks in one tiny geographical region.

    Indeed – unlike liquidating any other part of my investment portfolio, liquidating my house gives me an immediate problem that night of where to sleep. Whereas if I sold all my shares it wouldn’t change my immediate position – other than having to work out where to stash the money.

    Going north is the way to go with housing costs – you get so much more for your money, you get better scenery in general. But the kicker is the best value is to be had where there are fewer work opportunities, so it’s made for the post-FI.

    Although I didn’t have the cojones or the free cashflow to really hit it, that Housa was sort of the residential property equivalent of REITs. There doesn’t seem to be anything like it now. There’s Hearthstone I guess, and Grainger. I don’t know why in the UK we favour amateur BTL landlordism rather than professional landlords, but that’s just how we seem to want to do that, as opposed to the professional landlords in the commercial sector.

    Sure. But writing “I’m glad to be out of UK residential property now” is a bit of non-sequitor if you actually still own a residential property, IMHO. 🙂

    26 Jul 2016, 7:39pm
    by The Rhino

    reply

    not forgetting you also get to live amongst northerners, infinitely preferable to the southern alternative. If there was a northern coastal city that caught a decent swell, had a cross-shore prevailing wind and contained a russel group university I would move there yesterday

    Ermine, I wanted to say thank you for your thoughtful comment over at Monevator and I couldn’t think of anywhere else to put it but here!

    It’s just over four months since I retired at 52 and so far it’s been convalescence along with trying to digest some other massive changes such as moving country and my father dying at the start of the year.

    Your comment about learning something new every day was well taken. I probably had a bad day yesterday, but as my scientist father used to say: in an experiment a negative result is just as useful as a positive result because you still learn something.

    I suppose I’m learning that my current living arrangements will not suit me going in to the future. That’s fine. It has nothing to do with work. My work, like yours, had become completely untenable. I still get bad dreams about it, which was completely expected, and because of my working circumstances retirement also meant leaving the country where I was living. Some try to put these big changes off but I’ve always thought that big changes, like many other things, don’t get easier when you get older.

    Soon I’ll be off to the Himalaya for a few months, before crossing mountain passes gets much less easy for me. I’m sure I’ll learn more on the trails there, just nothing that has “value” for the system I’ve left.

    The best thing about this blog is it covers what I think is the important stuff. Having achieved FIRE, it’s that important stuff that interests me now.

    Was it Gavin Young who said “seize life on the wing, but hurry!” So many such invocations are directed at youth, but as we age and the currency of time ticks by without pause, so few seem to hear the tone of increasing urgency.

    @Jim Thanks (it was this one pushing back on the value of work after FI). I’m sorry about your loss, and agree that if you had to move country then carpe diem, and embrace the change.

    There are clear differences in people’s need for work, but I think it’s inherent value for self-respect is part of the myth of working, and in my view a limiting belief. It’s fortunately one that fails safe – in the end if one is financially independent but misses the meaning of work, well, the solution is obvious and doesn’t really hurt anybody, and can only improve your financial status.Most limiting beliefs have a far more adverse effect on their holders’ lives.

    But I am acutely aware of having failed to live intentionally and think about why am I selling my time for money and whether there was another way until my late 40s. I left work early for entirely negative reasons, only later did it become clearer to me that I had also passively scored a big win. I got eight years of my life back, and so far touch wood in good health too. Working those years would have been a terrible waste of about 10% of my lifestream.

    The decompression period seems to take longer than certainly I anticipated. I wrote this after two years out and thought I had done with the process then. In hindsight while it was the end of the beginning of decompression, it wasn’t yet over halfway.

    > before crossing mountain passes gets much less easy for me.

    Don’t tell yourself this, I would venture. Give yourself the vision of climbing mountains at 70 and more 😉 For sure, accept changes that do happen, but I found my physical health improved after finishing work. Not only the issues of stress, but I eat better and walk much more. I can’t say my physical health was bad while working, I have been lucky so far on that front. But it has most definitely improved. It isn’t just the physical either – I learn faster now than in 2012.

     

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