30 Sep 2017, 1:46am
housing
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  • Michaelmas – a good time to get out of Britain’s favourite asset class

    The Ermine has lately been that pariah of the bien-pensant crew, a vile second homer. Not particularly because I wanted to oppress the young of some rural district but to give me some more time to move, and widen my options. As such I have been long residential property. When everyone else in the UK looks at residential property they see this

    but when I look at UK housing I see this

    Housing is a particularly evil asset class because you tend to be a forced buyer, initially when you get old enough to need to set up on your own or want to fire out kids. That’s basically a function of when you are born, then add about 30 years. There’s not much scope for riding out the market cycles which are very long with housing compared to the stock market.

    In our case although I was a free agent after retiring Mrs Ermine was very much connected with the location, but it started to get apparent that working in the open was starting to get physically demanding, and various things got in the way of even being able to get a field shelter. So it was time to move on, but the trouble was that just before we came to this conclusion, the good people of Britain decided they wanted the 1950’s back. I know that the protagonists say that dynamic Blighty is being held back by the sheet anchor of trading tariff-free with the EU and wanted to take back control, but the trouble with all that is none of them seem to have a clue. They don’t agree on what they want, and they have no idea of how to go about it. Brexit may mean Brexit but no bugger seems to be able to tell us how they plan to make it happen. Those that do major on bluster rather than substance, BoJo, I’m looking at you, while you’re not busy making our man in Myanmar’s toes curl by reciting Kipling in their temple, FFS. I know you want to recreate the glory of Empire, but not everyone is as fond of it as the Brexit brigade and as foreign secretary it behooves you to keep that in mind. Keep the Kipling for the Conservative Club, eh?

    The UK housing market seems to be in a strange place at the moment, puffed up by low interest rates. I wanted to go upmarket a bit, and there seems to be a strange effect of compressing prices. You seem to have to pay an awful lot to get anything at all, and not as much more to get a lot more house than when I last bought a house. We aren’t getting younger, so I wanted to do this before Brexit, not after, although people going upmarket want a housing crash. But I didn’t know if that compression would unwind, and in the end I don’t have enough time to sit out the cycle.

    So we bought the new place a couple of months ago and completed the sale of the old one recently. It’s good to be clear of it by Michaelmas – one of the old quarter days. The quarter days were traditionally days when debts were settled and when magistrates would visit outlying districts to administer their justice.

    “There is a principle of justice enshrined in this institution: debts and unresolved conflicts must not be allowed to linger on.

    However complex the case, however difficult to settle the debt, a reckoning has to be made and publicly recorded; for it is one of the oldest legal principles of this country that justice delayed is injustice”

    On the way to the Postmodern

    It is pure happenstance that this came good for me by Michaelmas, but I like the olde-worlde symbolism. Some commercial leases still cleave to the old quarter days for rent periods – I noticed some shops closed or moved in the last week or so, presumably when their rent period ended.

    I discovered that the trauma of the first house I bought runs very deep. Whenever I look at a house, in the back of my mind there is a siren going off which asks “yes but what happens if this falls by half in real terms” because that’s what happened to me. And there are parallels with 1989, cynics would say that to an Ermine every year has parallels with ’89 in housing – but:

    Prices were in the late 1980s Lawson boom because of government policy. Well, they’re high now because of government policy – 10 years of interest rates way below the long term average means people can ‘afford’ to pay stupidly high prices. I would hate to be bringing new money into this market – although we have bought ridiculously overpriced property we were selling overpriced property to buy it, and divesting ourselves of land which is a similar asset class.

    Then, in a couple of years, there was a recession in the early 1990s. Perhaps in a foretaste of Brexit we attempted to track the ERM and failed dismally in 1992. I was paying a mortgage rate of just shy of 15%. Unless you’re a rampant Brexit booster we have that recession coming our way, hell, we voted for it. If anybody wants to see what Britain’s free trade agreement with the US will be like, well, let’s see how it goes with Boeing and Bombardier, shall we? The Telegraph is steaming that May took dictation from the EU, but the US is the 900lb gorilla compared with the UK. It will be a case of “here are the terms, you sign here”.

    So we have high valuations, the only way for interest rates to move is up, and we have got a recession on the way. As the IPPR said in forever blowing bubbles

    In short, house price rises are particularly vulnerable to depart from fundamentals and are very hard to correct if they do. Meanwhile market actors are likely to suffer from momentum behaviour and have strong reasons to behave speculatively. So, we move from periodic bouts of fear of ‘missing the boat’, followed by the pain of negative equity and retrenchment.

    OK, so we haven’t heard much about negative equity for three decades. So it’s all different now and that will never happen again. Until it does. But at least I’m out of here. One bite of that damn cherry is enough for a lifetime.

    Buying a house is a lot more scary without a mortgage

    I last bought a house 20 years ago, with a mortgage for most of the capital. You never see most of the money, because a lot of it’s between the solicitors and the mortgage company. When you do it without a mortgage, massive amounts of money go flying in and out of your bank account – for starters the normal payment system seems to max out at £100k, so I had to go to the bank to initiate a CHAPS payment. Then of course there’s the  stress of trying to ensure thieving bastards don’t intercept email transactions, basically don’t let solicitors act on emails account details, face to face is the only way 😉

    You can borrow from your ISA under certain conditions

    I also learned that you can borrow from your ISA, this helped me capitalise some of the second house. To do that it must be a flexible ISA – not all ISAs are but it so happened that my Charles Stanley one was, although my TD Direct ISA wasn’t. I use the CS ISA for index fund investing, basically world according to Kroijer  with an L&G FTSE World ExUK tracker, to lean against the UK bias of my shares, matched with VGLS100. I sold a hefty chunk of this and took it out, as long as I put it back by the end of March I still have my entire 20k allowance for this year. Which is pretty neat. What borrowing from your ISA won’t help you with is if you need to borrow money across the April change in the tax year – in that case you lose the tax shelter.

    All this means my ISA is about 30% in cash now. I’m not in that much of a hurry to restore it to what it was before because the markets are at a high, but I am still regularly buying the two funds back.

    > world according to Krojer

    Kroijer

    Ta – sorted!

    Handy tip about ISA usage. I own no property as I live with Mum in her house that I will inherit, but will probably want to move from, but I’d much rather be a no-chain buyer, and don’t want to sell my unsheltered trackers and get hit with years of CGT while bridging.

    It’s quite remarkable – here is Charles Stanley on flexibility. You need to keep the transaction within the same ISA provider, ie draw from CS put back there, and it simplifies things a little if you haven’t made this year’s contribution. I don’t see any reason why you couldn’t do it with more than one ISA provider, if they offer flexibility.

    It’s easier to do that at all time highs, crosstalking your house purchase with your view of the stock market is a pain. Although I hope never to need to borrow money again, it is great to have this possibility!

    So are you now trading under a dishonest monicker?!
    I have to say the main anxiety for me about home buying and moving is that you never know what hidden problems you are taking on. Considering the sums involved, we do hardly any investigation on what we are buying.
    But I don’t worry too much about over valuation, as I don’t really think of my house as an asset (of course I’d think differently if I hadn’t been owning property since 1990. I also live in a region where prices haven’t been increasing in real terms since 2007).
    Anyway, congratulations on the new home. Hope you enjoy it.

    > So are you now trading under a dishonest monicker?!

    yes, it looked smart seven years ago, but there we are. The best laid plans and all that 😉

    I don’t think of the house as an asset either. But owning two of them, the second one is definitely in financial asset class, which is why it was great to get rid of it at last!

    It’s fair comment on hidden problems, though it’s also good to get away from some. I don’t ever want to have a flat roof ever again, other than on a shed. Or an extension. And while I liked the wood burner at the old place you need a source of free wood and a lot of space to store it and swing an axe. I may feel different about that after a winter, of course. There again, Mr Khan and his buddies may nix that sort of thing as a public health hazard.

    30 Sep 2017, 10:46am
    by methuselah’smother

    reply

    Dear, dear ermine, thank you so much for this post. I’ve been indebted to your musings for a considerable time, but this one really hits the button because I’ve been trying for a similar manoeuvre for nigh-on fifteen years now. An awful lot of life has got in the way meanwhile, and I too regard my home as primarily just that, but I’d most heartily endorse the warning that psychologically buying with one’s very own hard-earned rather than the friendly neighbourhood loanshark’s is infinitely harder, in addition to the ISA contortions.

    So far there’ve been around a dozen spasms of buyer’s remorse just in time to avoid any financial penalty other than surveyor’s and legals, none of which are grudged or regretted, plus Brexit has intervened in good time to prevent retirement in some sunnier clime. OTH, the extra 3% SDLT has added further inconvenience/pain, should (as seems inevitable) the market tank between purchase and sale. You seem to have achieved the act with exemplary celerity, so may I humbly request an update on your tax reclaim when you achieve it (for sale of original within 3 years of purchase of its replacement, as I understand it)?

    I can’t tell you how happy I am for you both, many congratulations and wishes for a long and happy life in your new abode.

    thank you – the SDLT is charged on the new house, and the process of reclaim is here from HMRC. I have never found the online form in a serviceable state, so I will use the paper form, and it is worth getting this specific piece of info

    details of the property that attracted the higher rates of SDLT, including the effective date of purchase and the SDLT unique transaction reference number

    from your solicitor who managed the purchase. I will have to chase mine for that, but I have learned after many years not to use the cheapest solicitor, so this will be OK, the firm I used managed both the purchase and the sale, and did warm me up to the SDLT hazard proactively.

    w.r.t to the large transactions, be paranoid. There really are people out there to get you, by redirecting the electronic funds transfer. Face to face and in writing is the only way, don’t use newfangled technology, to be honest I’d be wary of the phone, never mind email. In the case of buying with a mortgage, at lot of the big money transactions don’t involve you and it’s all a lot less risky because it’s someone else’s risk – if your solicitor credits the redemption of your old mortgage to not the mortgage company it’s his screw-up and professional indemnity to pay.

    The compression in house prices does not surprise me, inflation no longer pays off the capital, hence the cost of the mortgage never really drops thus less money to spend on the next step of the ‘ladder’. The first step however is not reliant on this effect hence it stays the same. In short, best thing to do at the moment from a financial pov if buying somewhere to live is to live in the smallest house that meets your needs (of course trading off needs v cash is no easy decision).

    Interesting perspective of the compression, I never thought of that. I confess up to this time I had never experienced the house price ladder of which you speak – I had to wait until my pay had increased and I had enough savings to make the first step. But at least the ladder worked for me this time, I was surprised at how much more I got for relatively little more outlay.

    There is of course a difference in the areas – Ipswich was just over an hour away from the London finance district by train, should people want to to that to themselves, whereas in Somerset basically forget it. But even comparing the equivalent 3 bed semi with one here compared with the same detached the compression seemed comparable.

    3 Oct 2017, 9:39pm
    by Edward Kernow

    reply

    Simple Living In Somerset?

    7 Oct 2017, 1:04pm
    by Edward Kernow

    reply

    Ah yes, same web address new website name. Took me a while.

    I tried a similar strategy as you this summer, buying to downsize without selling. Unfortunately I had problems releasing the funds, afraid that someone would intercept the payment from my bank to the conveyancer. I was using an online conveyancer and was not sure about the wisdom of transferring cash that way. The vendor got fed up things were not moving quick enough and sold to someone else – the agent did not tell me there was another buyer trying to have their way.

    Respect for sorting out your conundrum.
    Live and learn.

    7 Oct 2017, 8:15pm
    by ermine


    Sorry to hear of your grief! T’internet seems to have made the conveyancing process even more ghastly than it used to be, though the process of finding a house is easier. I really hate the English process, and everyone was decent in my case but it’s still a horrid experience…

    There don’t seem to be any good answers to the poor security of bank transfers – other than a good old cheque handed over to the solicitor in person.

    2 Oct 2017, 11:31am
    by Playing with Fire

    reply

    So pleased you are back to posting Ermine – I was concerned that you’d decided to go back to w*rk. I found the comic xkcd.com/1894 captured my thoughts about buying a house for actual cash with scary accuracy.

    Thanks! My view on work has definitely hardened against, now that I have survived the first five years on an inadequate equity buffer but been graced with good luck in the markets, I am now in three years of reaching my main pension so my cash buffer will take me there even if the stock market falls to zero. I’m definitely of the going nuclear school of thought!

    I just didn’t totally have the cojones to follow my heart, plus I couldn’t have left people in the soup where I had the skills to fix it. I’ll be more careful in future 😉

    That xkcd comic has it spot on. The numbers are scary big. And the transaction process seems to have minimal security, there’s no closed loop feedback in bank transactions that the name is right. Given a sort code and account number you could enter Mickey Mouse for the recipient and the computer wouldn’t care less. It’s a step back from a crossed cheque with A/C payee from days gone by.

    Well done for finding buying and selling your own house in a short time period.

    I have had 3 aborted purchases in the last 18 months. In each case we were going to sell ours later for our own convenience.

    There were various problems with each of the properties but a common factor for all aborted purchases was that I always felt uncomfortable about being caught out in a downturn if our house failed to sell after over paying for one we buy.

    Congratulations with getting away with this hazard and receiving a price ‘compatible’ with the purchase price.

    I too was caught out in downturns of old. Bought first house for 42 sold for 36 (a 15% fall). Bought next house for 124 which the person I bought it off paid 160, a 22% fall. So experience has taught me that higher priced properties fall by a greater amount than lower priced ones.

    Apparently my house is valued at 450K-500K now, I would be happy if mine fell by 15% or more if the higher priced properties fall by 25% or more.

    Patience required.

    Surely it can only be a matter of time before interest rates start to cool the market.

    If this doesn’t work then keep ours and buy a decent property in France for much less than we would pay in the UK. But there is Brexit that might throw a spanner in the works.

    I only had the cojones to take the gap because I already had a buyer when I completed, and their daughter was due to go to secondary school. Apparently my house was in the catchment area of Northgate school, which is considered better than Copleston which is where they were. I had been blissfully unaware of this, but i figured them needing to move by a 26th Sept deadline helped my case. I hope it works out for them next year.

    What to do about Brexit confused me too, logic would say move afterwards, as you say the loss on a dearer house should be proportionally more. I found the compression of house prices very strange. But losing a friend to cancer in his early 60s in the last year reminded me that life is short, and in the end I had the money although in Mr Z’s terminology buying more house is foronic. I would be lucky to see another three decades, so waiting for the rubble to stop bouncing after Brexit could be a significant part of my remaining time. So I figured I’d accept the hit, though I expect the difference to go down the toilet in the upcoming crash. But hey, YOLO – and I don’t owe anybody any money now and can get on with paying back my ISA 😉

    2 Oct 2017, 5:13pm
    by The Rhino

    reply

    So where did you move to?

    You beat me changing the header by about half an hour 😉

    And there was me thinking I had missed the purloined letter for the past couple of days…

    Congratulations on the move and enjoy exploring new territory.

    3 Oct 2017, 3:06pm
    by The Rhino

    reply

    any more detail? I’m not after your house number 😉 but say the nearest market town or something. I’m genuinely interested to know where sensible people choose to live..

    Wells is probably the nearest market town, but they are far and few between in Somerset. My choices were skewed with having some connections here, and I wanted to be above 20m ASL because the county has a history of flooding. It wasn’t called the summer lands because it was endless summer, but because swathes of it were impassable in winter 😉

    4 Oct 2017, 12:00pm
    by The Rhino


    looks like a good spot – nice having the mendips on your doorstep – and I imagine you’ll be a regular down wookey hole.. enjoy!

    3 Oct 2017, 3:07pm
    by The Rhino

    reply

    PS – that is very interesting about the flexible ISAs – super useful for house buying. I will file that one in the memory banks for later..

    Welcome back to the blogosphere and congrats on your move to what I think is called the West Country. We went east when we did this 12 years ago – from 50 km west of Toronto to 350 km east of it.
    The property ladder move was lateral – to a slower moving ladder but with no change in amount invested. We had to bridge things for a week before our old place was sold. Traded a 35 year old four bedroom two storey for a new three bedroom bungalow.
    It’s all a matter of lifestyle anyway when it comes to housing. If you don’t have some other cash to pay the bills besides your home equity you are basically screwed. Of course 75% of Canadians are idiots and don’t realize this.

    Congrats on the move, good to see you back.

     

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