18 Apr 2017, 11:24am
housing personal finance:
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  • Fear and loathing in Britain’s favourite asset class

    On a small island with a lot of people, there is one type of asset that has become a national religion for Britons, and that is residential housing. You can’t lose with bricks and mortar, is written through the national psyche like the lettering on a stick of rock. It runs so deep within the national character that we have the common spectacle of well-off people preying on the poor by buying up houses to rent to others on a onesy-twosy basis, using the terrible security of tenure in British rental housing facilitated in the Housing Act 1996 to extract cash from those who can’t get a mortgage because they are too poor.

    Thatcher handing something over that wasn’t hers to give – an early RTB house deeds

    So rich people use their better creditworthiness to borrow money to buy houses to let, renting them out to poor people who can’t borrow money to buy houses, and making a tidy profit. They even claimed back the tax on the mortgage interest, a privilege denied to the poor saps who are buying a house on a mortgage to live it it. I am pleased to say that this nasty little anomaly has been canned now 😉 Britain has too few houses as it is for people who want to buy-to-live, they don’t need BTL (buy-to-let) middlemen inserting their money funnel into the punters’ wage packets sponsored on the government’s dime.

    When the Ermine was a child, this job of landlording to families was largely done by the councils and the poor and even the modestly well-to-do had the option of renting with an adequate security of tenure, but those days were lost when Thatcher bought the votes of the sitting council tenants by selling the council housing stock to them at a knock-down price. The official version of this is of course a roaring success

    the policy of giving tenants the Right to Buy on advantageous terms their council houses gave immense pleasure to many who had never imagined being able to possess a place of their own and pass it on to their children. People were ecstatic.

    Well, they would be. You always make friends dishing out free money, and it was the discounts (a.k.a. free money) given with Right to Buy that made the impact

     the Right to Buy had benefited a large number of individual households but it has also had an uneven impact spatially and socially, has added to residualisation in social renting and has had an adverse strategic impact on housing. The discounts provided under the Right to Buy had inflated the demand for home ownership. In the longer term transfers to private renting further diverted resources to meet higher rents in the private sector rather than providing additional or affordable housing.

    […]

    Looking back over the history of RTB it is apparent that, rather than the symbolism associated with a legal Right, it was the manipulation of levels of discount that were key to the operation of the policy. The Right to Buy with lower discounts would have had much less impact.

    Which is how we got from my London grammar school days when about half the kids lived in council houses, including some of the ones whose parents were white-collar workers, to today where almost half of all local authorities in England no longer have any significant council housing.

    Housing is to the Ermine as Moscow was to Napoleon

    Rule 1, on page 1 of the book of war, is: “Do not march on Moscow”. Various people have tried it, Napoleon and Hitler, and it is no good.

    Monty

    So it is with the Ermine – the greatest personal finance error I have ever made was buying a house in 1989. I have never managed to beat that level of numbskullery despite greater resources. Now I hope that this is an indication of actually using the intervening 30 times round the sun to improve the art of being human, but let’s face it, the bar was set very low for the depths of financial folly I needed to avoid plumbing again. I moved once since that first house, because a two-up-two down was okay for a bachelor Ermine but when DxGF moved in it was time to get some more space, which is the entirely average three-bed semi I am in now.

    When I bought it in the dog days of the dotcom boom, I bought the new house before completing on the old house. That sort of thing makes moving a lot easier, and you can get decoration and rewiring done much easier in an empty house. I hate being a function of other people, so housing chains rub my fur up the wrong way and make me snarl. The amount I had lost on the old house meant I could carry the old house with a combination of savings and a hefty 0% interest loan on a credit card, I had a 90% mortgage on the new house.

    I am looking at moving again, and it is a significant distance across country. Retiring is a good time to think about where you want to live, as the limitations placed by working are lifted. It’s not necessary to move, but I find the the dreary journey halfway round the M25 to get past the carbuncle of London more and more irritating, now I have the time and the money to travel more. On the other hand, a retiree needs to think about the human setting, so we want to move to an area where we already know a number of people, so in our case that is westwards but not particularly northwards.

    Stoney Littleton Long barrow. One of the many megalithic sites that draw me westwards as a retiree. No, I’m not planning to live in it 😉

    We own this house outright, and have stocks and non-residential land assets, the combination is considerably more than the sort of house we are looking at buying.If I put the stocks together with the proceeds from the land assets and cash I hold, I have enough to buy a house of the sort I want before selling the current house. Trouble is all the stocks are in my ISA. Some of the cash is with NS&I ILSCs, ideally I would prefer not to sell that either. Some of it is in my SIPP, had I jumped to it I would have drawn out to just below the higher rate tax threshold last month, but I failed to engage brain there.

    I get to do that this month, drawing ~43k gross, and pay £7k in tax. I can chill about that because I would have paid 41% in tax had I not used the SIPP when I earned the money. So I am still 21% better off, and indeed I got the Brexit boost on that last year since it was in some international exUK index fund.

    I started to sell out of some of the ISA, though of course keeping the cash in the wrapper until the last moment. I started with the crap, the sorts of things one acquires in a HYP but turned out to be a really bad idea. Many years ago I came to the conclusion that while I may do okay on buying, I have no talent for selling, which is why in the HYP I don’t sell out of the crap. Some of it even came good – dogs like RSA eventually crossed the loss to breakeven to profit mark simply by paying dividends. Some didn’t, I followed Warren Buffett into Tesco, and, well, ’nuff said, eh? At least I had illustrious company in the cock-up. I paid less than WB 1, but he bailed faster. As Buffett said (p18)

    In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

    I ain’t got Buffett’s talent, I was far too trigger-happy as a seller, so I needed to stop that. That trigger-happiness shows even in my actions here – although I believed I was going to liquidate the entire ISA to raise the cash at the time, I started shooting dogs first. A different way of looking at reversion to the mean might have started to liquidate from the top, after all those are the greatest gains to be crystallised. Once a mutt’s lost > 50% most of the damage has been done 😉

    you had it coming to you, bud. There is a school of thought that says you should actively seek out dogs, but I’ve waited many years for my ISA mutts to turn, they aren’t just last year’s disreputable hounds

    Shooting the dogs was easy. Most of them I’ve had for a long time and they’ve never come good. Now a fifth of my ISA is cash, and I’ve run out of hounds to put up against the wall.I had about a twentieth of the ISA as mutts, I sold about a twentieth of good stuff before I just couldn’t do it any more, and a tenth I carry in cash because you never know when buying opportunities may show up.

    exchanging equities for housing felt that I was marching to Moscow. No good would come of it…

    Look at the housing market now. It is up in the sky 2. We have the economic damage 3  of Brexit coming down the pike, inflation is lifting which may bode rising interest rates and the market is softening. That’s not necessarily a bad thing for me, as I am looking to move upmarket. I’m not carrying any debt once all is settled so rising interest rates don’t trouble me, but they sure as hell will trouble others in the market carrying a huge mortgage based on affordability at 2%. Which will depress prices, because if they can’t pay they won’t pay.

    This play by Dario Fo was big in the early 1970s inflationary oil shock. The title could be the anthem for Britain’s overstretched mortgagees as Brexit inflation starts to bite and interest rates rise. According to Wikipedia, Pluto Press was a division of the Socialist Workers Party when this was published.

    I looked at what I have left in the ISA and I simply couldn’t bring myself to press the sell button, and exchange stocks, something of value, for housing, because I loathe the housing asset class. Couldn’t do it even on a temporary basis, as I searched for something else to sell from the ISA and would have had to mine the good stuff I began to feel sick, and an old recording started to play out in the back of my mind. A recording first made in 1990 through to 1992, when I froze in that first house to save money for the mortgage and subsisted on peas, economy bean soup mix 4 and rice while I watched one neighbour get repossessed and the other side jump before that happened. Interest rates came within a hair’s-breadth of 15% p.a. Intellectually I can tell myself that things are really different this time because I am not buying as a leveraged buyer with a mortgage, but it’s no good. I drank the water from that polluted well before and was sick for ten years. Sure, I’ve taken losses in the stock market, but never got to lose more than I had to start with…

    Repairing the ISA

    I need to go fix the damage I did to my ISA estate by trying and failing to convince myself I was going to liquidate it to bridge the housing purchase. I can’t honestly say I am that sad to see the back of the dogs, though they did of course serve as a sort of memento mori reproaching me to the tune of “Self, you aren’t such a fantastic hot-handed stock-picker – I am TSCO and I remind you that you had absolutely no ‘king idea of what you were doing trying to slipstream Warren Buffett, so don’t get so full of cock”. I have a limit order on some gold that should go through this week, because God knows what the pound will do over the next couple of years, and it’ll bring down the cash to 10% where I’m easy with it. There is a case to be made that a fellow with no unwrapped holdings any more should hold his gold outside tax wrappers, because I don’t have so much that CGT would be a hassle, and gold doesn’t pay dividends which are troublesome outside a tax shelter nowadays. But I just need to get it to a holding position for now. And my Charles Stanley ISA needs to go back into VWRL and L&G Dev World ExUK where it was, so I get to eat a load of transaction costs for my thumb-sucking indecision. Bummer. Still beats the hell out of losing all that ISA tax sheltering. At least I stepped back from the brink. Obviously I’m not putting my £20k new contribution into the ISA while I need short-term float, because I have till nearly this time next year to get round to that.

    There’s the smell of decay in the air on housing

    A grizzled snout sniffs the air, and I smell the sickly scent of putrefaction in the housing market, the scent the youthful Ermine  insouciantly ignored. One of the things that puzzles me about housing now is the shocking compression of prices. When I was buying my first house 5 on the  terraced places were about £45k, and semis were about £60k 6. Where I am looking Zoopla tell me terraced houses are about £214k and semis are £248k. It’s as if the entry-level prices have been skyrocketed proportionally, whereas the incremental costs to get something better has reduced. The terrace to semi ratio was  1.3 in the late 1980s and has fallen to 1.16 – you get a lot more for a little bit extra, and this still sort of holds going up to detached places, which command less of a premium than I expected. It is as if first-time buyers are flattening themselves, artificially boosting the crummy end of the housing market. Looking at my existing area this ratio is about 1.2. Only another 10% on my house would get me a detached house over the road. Of course Zoopla could be full of crap, but these differentials seem very squeezed to me.

    The Ermine’s twitchy snout has picked up the last ten of the one real housing recessions we’ve had this millennium, so I am prone to false alarms, that early experience of housing is a distorting lens through which I look at Britain’s favourite asset class. It’s why I am not a BTL landlord, and property is a lot less than half my net worth. This is not because fundamentally I have a beautiful nature full of compassion for my fellow man, after all if I am not a BTLer then some other person will step into the breach. I am not a BTLer because I am shit scared of the asset class, it’s hateful because of what it did to me, it’s illiquid, it depreciates much faster with a tenant than an owner-occupier, and there seems a shedload of miscellaneous aggravation that goes with the whole patch.

    Everything is vile about buying and selling houses in England. I haven’t done it for almost twenty years, and while the experience wasn’t great then, many things seem to have become worse. For starters, exactly what reason does an estate agent have to exist in the 21st century? The cheeky blighters seem to want to see proof of capital assets before taking an offer to a vendor, which is not easy in a distant town with ratty internet connections 7 and no printer. This was an absolute blinder on me and was definitely not the case 20 years ago. I suspect there was also some subtle discrimination too, if I had shiny shoes and dressed in a sharp suit I might have been given the benefit of the doubt. But seriously, WTF is the point of an estate agent? I use rightmove to search 8, the days of receiving endless offers of places 200% overbudget through the post aren’t something I want to go back to. Rightmove and other Internet sites actually listen and don’t show things that are overbudget. I would have thought the Internet would have fixed the problem of estate agents by eating their lunch by now, but it appears not.

    I’m also unlucky enough to be selling into a gently softening market sector in Suffolk and a slightly appreciating one where I want to go. Some of that is because of who I am and what I want to buy. I want a detached place because I don’t want to hear people’s kids, pets and domestics, we want more garden, and stairs if any only in a straight line. I don’t want to see children’s trampolines and plastic toys, or people fixing cars in their front gardens. I don’t want to hear traffic from main roads, and I have no interest in new houses, which are tiny and too close together. I don’t want a ‘period property’ which is a maintenance and energy efficiency hazard. I don’t want anything near a river or less than 40m above sea level because of flooding amplified by climate change, low-lying parts of the target region has had problems with this in recent years. Something built from the late 1950s to 1970 is probably about right.

    I am competing with old gits like me who have a working life behind them, and what I am selling is a 3 bed semi which is a typical family home. Families made hay with all the child-friendly largesse Labour showered them with in the times of plenty, and are feeling the draught now.  Hence the softening market my end. Countering that I am looking to move somewhere where there appears to be zero professional work to be had for forty miles 9 which tends to be the way for attractive places because work is usually a blot on the landscape.

    The design of the conveyancing system in England is foul, where there is no commitment from the buyer and seller until exchange of contracts; something done so much better in Scotland and probably just about any other First World country. The English way brings out the worst in both the buyers and sellers, making evil shits of us all. Requiring a 10% escrowed deposit forfeited if either side welch on the deal would improve that no end. Hopefully being a cash buyer will help the power balance for me there, and not having a chain will help with selling. Time will show.

    How about joining my fellow countrymen on the never-never?

    How about borrowing? It’s all the rage on this septic isle, I hear. I can breeze way past the average UK household non-mortgage debt of £13,000 and lift the old stats a bit. Normally the Ermine has the same attitude to debt as a vampire has to sunlight, but:

    I have the cash, but it’s tax-embargoed in my ISA and SIPP. Unlike the rest of the country, with their rising credit card debt, PCP car loans and whatnot in need of government help to bail them out of their fiscal stupidity, I actually have the money to back the loan. As long as I pay less than 20% over the life of the loan I am better off borrowing the money than paying the extra 40% tax on it taking it from my SIPP, which I need to clear down to £3600 10 before reaching normal retirement age for my main pension.

    I can’t get a mortgage, because I am too old and mortgage affordability is all about income. I would have thought a DB pension payable in three years time would be good enough as an income but it has to already be in the process of being drawn, and the SIPP doesn’t count because I draw in variable amounts a year according to need. The credit card company won’t give me an increase in credit limit to use the balance transfer stunt that worked when I bought my first house, because I am poor in their eyes, under the railway arches poor..

    MBNA to Ermine – “Swivel on this, bud. You may, of course, beg us on bended knee and we may graciously reconsider your request”. Ermine thinks to self “well up yours too then”. There are other ways to skin this cat.

    In 1989 two credit card firms loaned me £15k, the equivalent of £34,000 today at 0% interest to reduce my mortgage LTV. And they got paid back on time. In those far-off days you didn’t have to declare anything other than income on a mortgage application and there were no credit reference agencies. The 20-something year old Ermine doing the most gormless thing in his financial life with no capital was deemed a better risk than the grizzled mustelid of today who actually has capital assets several times the putative loan. No. I’m not bitter and twisted. Really I’m not 😉

    I have been a small-time ~5k Zopa lender since 2013 until now when I recalled that to build up reserves, and curiously enough Zopa offered me a decent amount for five years at 3.4%. They had a much better repayment structure too. You have the take the loan for a long term, so that the repayments aren’t too high, but for a part bridging loan I don’t need to keep the loan for the term. Normally if you take a loan for five years, you don’t save any interest repaying it early. With Zopa it seems there is a fixed fee of .6% you pay if you have the loan for a microsecond or all the way to five years, plus 3.2% p.a. As such carrying the loan for six months would cost 2.2% of the loan – much less than a normal five year loan for that APR.

    I liked Zopa, though in the end their 25k lending limit isn’t really enough to put much of a dent in the ISA. But I’ve often had the odd tax, ISA filling or CGT need to defer liquidating unwrapped shares from one tax year to another and I wish I’d thought of them before. I’ve used credit card 0% offers for these applications, but the trouble is one has to borrow about twice as much as needed (and pay the arrangement fee of ~2% of the total) because of the requirement to pay down the loan at 5% of the residual a month. Zopa is a much better match for that sort of thing.

    In the end I raised the loan privately. It seems commercial lending to punters is axiomatically all about income, so it will always be mismatched to FI/RE folk. The takeaway from that when interest rates are low is don’t pay off your mortgage early – you will often need flexibility as you thread your way in early stages of FI/RE, particularly before you reach your DC pension age (55 at the moment). That mortgage gives you flexibility, and the tax-free pension commencement lump sum is a good fit to paying down the capital – effectively you redeem the capital with deferred pre-tax income.

    BTL-ers score several hits on the Ermine by proxy

    BTL owners are bad news for owner occupiers, for different reasons than why they are bad for tenants and for first-time buyers. As an owner-occupier you want to move away from such areas. BTLers are strapped for cash, and they aren’t there in person to deal with the consequences of their or their tenants’ actions. It slightly disturbs me that all the regions I used to live have gone downhill. My parents’ place in SE London used to be an owner-occupied zone where they were among the poorer on the block, over nearly 50 years it became a dump where Stephen Lawrence was murdered, I had a pushbike locked to itself half-inched from their drive in the 1990s, they got robbed in the early 2000s. I wouldn’t dream of living there if you paid me and provided an armed guard. And it’s gone BTL, because, well, it’s London.

    Two places I had a bedsits in west London seemed to have descended into high streets of dirty chicken shops, betting joints and fast food retail. I guess the areas were already fully landlorded, but landlords in those days used to really own the places they rented, tending to be on a professional and larger scale. The blight of BTL mortgages started in 1996, around the time the AST was enacted, so BTL landlords could know that they could kick tenants out on reasonably short order. The area I bought my first house in Ipswich in ’89 has become a BTL rental dump with frequent mattresses on the street and much multiple occupation, and towards the end I had a pushbike nicked from my own back garden – not particularly to do with the BTL-ers but bike thieves prey on studenty neighbourhoods and BTL had made it studenty, so it was worth doing over for bikes. I’m beginning to suspect this downhill drift is a curse on me, but at least so far I’ve jumped in time…

    Hopefully the BTL thing will be reined it a bit by not letting the BTLers squeeze real people who couldn’t get tax relief on mortgage interest payments, the poor devils are so desperate that first time buyers sometimes try to masquerade as BTL buyers to get round the way the system is stacked in favour of BTL buyers. I’m going to watch carefully for the presence of BTL in the next place I go.

    BTLers have other adverse effects on housing – the market has slowed after being pumped because the buy-to-let brigade are finally getting soaked on tax on the same basis as real people who actually live in the houses they buy. It is perhaps a reason for the softening where I am, I’ve noticed more To Let signs and when you look on Zoopla they have been recent sales , so BTL was over this area like a rash a couple of years ago.

    And finally I take an incidental hit in needing to front the extra BTL secondary home ownership stamp duty tax for the time I have two houses. I have zero ambition to become a BTL landlord, but I have to drum up an extra £10k because of the guilt by association and presumably have to fight HMRC to get it back.

    But UK property is hopelessly overpriced?

    Yes. It’s a foul asset class that has screwed me royally before. It will no doubt screw me royally again, at least to the tune of the difference between what I sell my current house for 11 and the price of what I buy. But for the bulk of the transaction I will be selling a hopelessly overvalued asset to buy a similarly hopelessly overvalued asset. I have another 20-30 years of healthspan if I am lucky. Waiting another two years for the existential clusterfuck that is Brexit to make all of us poorer may save me money if there’s a housepricecrash, 12 but it is 10% of that healthspan. The gimlet-eyed older Ermine is more able to take the hit than the fresh-faced twenty-year old Ermine who was shafted by the 1989 housing market. In theory a softening market is good for someone going upmarket, but the devil is in the detail, and there is always devil in anything to do with UK residential property.

    Notes:

    1. I bought into some of the suckouts, which reduced more my overall cost of acquisition. But TSCO was still a falling knife, and WB is still a better investor than me
    2. Equities are also up in the sky now, although some of that is the Brexit effect making them look higher. But they’ve been tracking up since 2009… However, the tax sheltering of my ISA has a separate value of its own, I would be in deep shit with the changes to dividend taxation if I had to hold it unwrapped
    3. or short-term adjustment to liberation pains if you are a Brexit booster
    4. I just took a look for bean soup mix and I’m chuffed that they still do this, though the price looks astronomical to me. This stuff explodes in volume when you cook it so the young Ermine could stretch a packet of it a very long way, more than a week ISTR. Note that it’s a lot cheaper if you buy the parts from your local store catering to local Asian consumers and mix ’em up yourself rather than buying from Sainsbury’s
    5. Although it was a similar time of excessive valuations, the distorting factor then was couples were rushing to buy to get dual MIRAS tax-relief on 60k rather than 30k, I presume they were targeting the semidetached sector with a view to having kids, whereas now the focus is on get anything
    6. this was in 1989, the 2016 inflation adjusted amounts are £102740 and £137000 respectively
    7. in the usual way, everything a mobile phone does, like providing a tethered data connection works, but badly and only a ghost of what it should be
    8. I do appreciate the irony of using something owned by a bunch of estate agents, but at least they follow my limit and requirement instructions properly
    9. I am, of course, looking at this with the jaded eyes of an ex-big company careerist, not the dynamic go-getting entrepreneurial sort that the powers that be hope will drag Britain out of the shit in the years to come
    10. which is the amount non-earners can put in a pension
    11. when owning two houses there is the risk of the market running against me over the difference. Although every other Briton believes you can’t go wrong with property I know from experience you can, and the current falling trend in the housing market is against me if I buy first and sell later, so I will try and minimize that period. Being a cash buyer and chainless seller has some value in the transactions, which may compensate a little for what I lose across the gap.
    12. HPC’s wishful thinking gives them an even worse house price prediction crystal ball than the Ermine, they predict a perma-status of impending house price crash, pretty much the last 100 of the one retrenchments we’ve had
    17 Feb 2017, 2:53pm
    economy housing personal finance:
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  • a look back in anger at the endowment, a popular investment of yesteryear

    Twenty-eight years ago I perpetrated the worst financial mistake of my entire life so far. I bought a house, in the hugely overvalued market of 1989. It seemed a good time to look back at how this happened, because today the Pru, one of the partners in crime regarding endowment mortgages, tells us that one in four retirees have never recovered from that kind of 1980s style cockup, and are carrying mortgage debt into retirement.Not only that, but three more waves of the the financial instrument of wealth destruction otherwise known as the interest-only residential mortgage will be crashing on the battered shores of British residential mortgagees in the next 15 years. I was only the advance guard.

    Very few people are rich enough to have saved enough money to be able to service big existential debts like a mortgage in retirement, so the financial whizz-kids seem to be selling these guys equity release plans to fix the failure of their younger selves to live within their means by eschewing one or more of holidays, kids, pets or general consumerism. I recently came across the documentation for that piece of feckless financial foolishness, so I thought I’d deconstruct it here. Obviously Brits have learned in the intervening three decades, so our housing market is not at sky-high earnings multiples with people signing away a quarter of their gross earnings nowadays. Or maybe not…

    You don’t have much control over when you come of an age when you need to find somewhere to set up house, most of the choices in that respect were taken by your parents and determined by the human life-cycle set by Nature. There’s a window somewhere between 25 and 35 when you need to tackle this issue. Your experience of housing will depend on what phase of the market cycle housing is in, plus some wider long-term societal changes, many of which are adverse. Cycles in the housing market a long – 10 years is not enough to see a whole cycle. I was a single man competing with an increasing number of dual income households because women were entering the workforce in larger numbers. I had already been driven out of the city of my birth by rising house prices and I really really wanted to buy a house, so much that I ignored alarm bells, massive factory sirens, red lights set at danger and just about every other indication that I was paying way too much. All I could afford was a two up two down where most of my colleagues from previous years were able to buy a semi on a typical graduate salary at The Firm. This even shows now – as an old git I am thinking of moving upmarket rather than down, because my hatred of the property asset class ran so deep that I never moved from the semi I bought a decade later.

    feckless financial foolishness deconstructed:

    Buying a house at that time was bad enough, but I compounded my mistake by choosing an endowment mortgage, because I was a foolish and greedy 28-year old. My parents had said the only way to buy a house was with a repayment mortgage, and made a decent case of as to why. So I listened to the sales patter of how a endowment could make even more than the capital, all tax-free, and the pound signs lit up in my eyes and in about half an hour I doubled down on the error of overpaying, signing up to this promise

    So putting my 28 year older and wiser head on my 28 year old body, let’s take a look at what is wrong with this. If the promise had held good I would have paid 25 × 644.52 = £16113 to get £41500 in 25 year’s time. Which is a fantastic deal, what’s not to like? Ker-ching. Oh and my mortgage gets paid off if I die early. To be honest that’s not my problem, I suppose I should have made a will, because that was never going to benefit me – strike one. What I heard in the sales patter was a very good chance of doubling the money. What the dimwitted 28-year old failed to take into account is that I damn well should expect to double my money in 25 years time – at the time half the value of money died through inflation every 10 years, so in 25 years that profit would be worth diddly squat. I was clearly not reading the documentation right, because it only offered an extra 15k using the most racy projections, sustaining an investment return of over 10% p.a. for twenty-five years straight. Easy peasy.It’s the selective focus bias – you see what you want to see.

    To get this putative win, I had to take an investment product described in the vaguest terms I have ever seen – never mind active or passive management, there was no idea of fees or anything else, it boils down to a statement of –  we will give it a go, but nothing is guaranteed, sunshine.

    There is no transparency whatsoever, but hey, the salesforce can say anything to big this up. If this offer came across my desk nowadays, the second word would be “off”. At least I can say I made some use of the intervening three decades to get a little bit wiser.

    So what happened? Let’s take a look at the state of play after fifteen years had rolled by, that’s half a working life in my case

    Well, the good news is that I get about £5000 more than I’d have paid in at the minimum guaranteed sum. The bad news is that even with a total return after fees of 8% p.a. sustained for ten years I’d have been £11k short. Now in 2004 £11k looked like a lot of money to me, and I was pretty damn sure that I didn’t want to eat this loss. 1

    It seems that unlike 25% of my fellow endowment suckers I took action during the term of my mortgage to pay the bugger down, and eventually I kicked up enough fuss that Friends Provident paid me off with a bung in 2005, which I also used to make a capital repayment. Then as my career began to flame out and crash and burn in 2009 I started paying down more and more of the capital, adopting a financial brace position against no longer having an income. That’s actually a really dumb thing to do for people who are trying to retire earlier than 55, but fearful people make bad decisions sometimes, and that was mine. It meant I was poorer in the last few years, but I will be richer from about now – the mortgage could have smoothed my cashflow between retiring from work and getting to 55.

    Look at those mad assumptions

    Even in 2005 they were talking about investment returns of 8% a year. That just ain’t gonna happen on a sustained basis, and the lowest assumption of 7% way back in 1989 turned out to be total codswallop. That was the risk-averse cautious assumption – it’s bloody nuts. This was massive sample bias due to inflation – after all, just ten years before I signed up inflation in the UK was running at over 15%. You know what the man from the FCA says

    Past performance is no guide to the future

    Well yeah, but WTF else are you going to go on – Tarot cards or reading tea leaves? Mystic Meg? Inherent in the very fact of stock market investing is the nasty little assumption that you can qualify what you will get in the long run informed by what happened in the past 2. Nevertheless, the 28-year old me could have avoided all those mad assumptions by doing the sensible thing and getting a repayment mortgage. Epic fail in market timing and choice of repayment method.

    Winter is coming…

    What’s really bananas is that people didn’t learn from the endowment mortgage debacle. Look at this chart from this FCA confidential 3 report published on the open web

    Oh boy, there is serious incoming hurt from these maturing IO residential mortgages over the next 15 years

    Wages are stagnating, though I guess the high Brexit-induced inflation has reduced all these guys capital debts by 20%. Let’s hope their wages keep up with inflation, eh, because otherwise Winter is coming, and it will be served up with a good amount of Discontent. Their pain will be worse too, because at least I had a deficient repayment method that would have paid about half of the capital. Since then interest only mortgages were written without any requirement to have a method of repaying the capital at the end, so these big cohorts are coming to the end of their 25 year extended home rental term aka interest only mortgage, and the requirement to actually buy the house will come as a bit of a surprise by the looks of it. Okay, so they have taken a call option on the price 25 years ago, but they’ll still need to whistle up the price or move out.

    Notes:

    1. I am being slightly disingenuous here, because Friends Provident demutualised in 2001 and I got about £7k in shares which I sold immediately, and used to make a capital repayment, which I guess brought the outstanding amount to  about £34k.
    2. this dirty little secret is inherent in the SWR and things like firecalc are doing nothing other than informing you from past performance
    3. I downloaded it on 17/2/2017 from https://www.fca.org.uk/publication/research/fca-interest-only-mortgage-review.pdf
    19 Jul 2016, 3:11pm
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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)
    19 May 2016, 5:35pm
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  • Buy to let is a rich person’s game – shock alert.

    Aw, diddums. The Torygraph is spitting bricks about the unprecedented assault on private buy to letters in the Budget. Apparently buying houses to rent out to people too poor to buy them themselves is becoming a rich person’s game. Colour me flabbergasted. You’re buying extra copies of the single most expensive thing most Brits ever buy, just because you can, so you can fleece some of your fellow countrymen for an essential good. Of course BTL is a rich person’s game. The amazing thing is that we permitted, nay subsidised, non-rich but still extremely well-off people to borrow cheap money to give poorer people the shaft for so long, and indeed it’s another rum thing that it was a Labour government that aided this stiffing in the first place and a Tory government that applied the brakes, ever so gently.

    Obviously if you’re rich enough to buy more houses outright, well, go for it. But the one thing that the British housing market doesn’t need is more cheap borrowed money chasing a limited stock of houses, so it’s about time that these leveraged ‘landlords’ got run out of town, particularly at the moment when interest rates are low.

    Now it’s been a very long time since the Ermine rented a place, but my experience of private landlords was that in general they were thieving scum that wanted all the profit for themselves and spent as little as possible on their properties. Now part of that was my own fault – I had bought into the collective mantra the pollutes the British psyche that renting is fundamentally A Bad Thing. I was Monevator’s sister, probably before she was born 😉

    “I am just throwing money away by renting.”

    I combined this with another toxic tendency, one I still struggle with at times, which is if it’s something I don’t feel a passion for, I buy cheap. And often buy twice 😉 Now with renting I avoided the buy twice, but I did buy cheap. Not because I had to – I could have afforded to pay twice as much. But I was tight. Because I am throwing money away by renting, I tried to throw as little money away on that. Not to do something else clever like save for a pension but to spend it on beer and travel and music and shit like that. I was in my 20s FFS. The downside of this of course is that I was drawn to cheapskate landlords, because I was a cheapskate. I’m sure there are good landlords. I never ran into them. I never rented houses, either – only rooms – well and got together with others to rent a house but we each occupied a room. The only decent landlord I had was the work colleague I rented a room from for six months before I stupidly threw money away on buying a house at the top of the market.

    So when the Torygraph wheels out some dude called Craig Scott-Dawkins, ten years younger than I am who  owns five buy-to-let properties in Leamington and Warwick, the Ermine heart of stone chills to his plight

    He said: “I voted Conservative because I thought they were going to take a steady approach. But they’ve knifed us in the back. These changes are making it more difficult for those of us who want to prepare for retirement. 

    Let’s bottom out what is actually happening here. Let’s take a look at Maslow’s Hierarchy of needs, what the human animal focuses on

    1402_Maslow's_Hierarchy_of_Needs.svg

    A house sort of goes in the red bit. Since we’re not snails or tortoises, we need a roof over our heads to keep the rain off, and hairless wonders that we are walls keep the wind off us so we don’t freeze in these cold Northern climes. There’s no fundamental need to own houses, true, and in many other European countries renting is a perfectly good alternative. There is a strong argument to make that renting suits modern employment patterns better, at least until having children, but that’s a different issue. So our poor Craig isn’t rich enough to actually afford to buy the capital base of his evil empire, and he’s bitching about losing his subsidy. Well excuse me Craig, but you aren’t a landlord because guess who owns these damned houses – that’s the bank. You are a lord of jack shit, you are a bank worker making their money work for them. You are also exposing your unfortunate tenants to the risk of you getting taken out by rising interest rates on your overleveraged farrago. How do I know it’s overleveraged? Because you’re a subsidy junkie. If you really had the money you wouldn’t take the hit on the tax changes, because you were charging interest against tax, something that the poor bastards who actually want to buy a house to, y’know, actually live in the darned thing, haven’t been able to do for over 25 years.

    The trouble is that the government in the UK had made regulations about renting so bad for both landlords and renters that it’s a deadly embrace that isn’t much fun for either when it goes wrong. The renters have little security of tenure, but if they dig their heels in the landlords seem to have to jump through some odd legalistic hoops too kick ’em out. It’s something made for people with deep pockets who can play a long game, not the ‘my BTL is my pension’ brigade, who believe in housing as an asset class because they can touch it as opposed to things like shares or bonds. That’s religion, and it shouldn’t be subsidised by the taxpayer, particularly when it puts our young people at such a disadvantage compared to our old gits who have suddenly got pension lump sums to splurge from Osborne’s pension freedoms.

    12 Sep 2015, 4:31pm
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  • Financial advisers and the triumph of hope over experience

    I thought I had done the whole UK property tragedy in this snarl, but Monevator pointed me to an absolute corker.

    ‘I’ve inherited £15,000 aged 20. When can I buy a £350,000 house?’ [he earns £17k p.a.]

    Let’s imagine our 20-year old hadn’t written to the retired colonels of the Telegraph, but had wandered into the pop-up-shop that is the financial advisers of Ermine, Ermine and Ermine, and asked that of the grizzled mustelid 1 sitting behind a desk with a green banker’s lamp.

    The ermine is child-free, but I don’t totally lack compassion, and a small tear would appear in the ermine’s eye, but he would give it to this young pup straight, unlike the two, count ’em, two, IFAs who appeared in the article. Something like this:

    George, me old fruit, I hate to be the bringer of bad news. You can’t get there from here. You, a twenty-year old young man, have just inherited £15k, which is roughly a year’s salary. You would like to buy a four bedroom detached house. You are on less than the average wage. It ain’t gonna happen. What you need to do is focus on earning more, and also scale back your ambition here. Let me tell you a story. I was earning far more than you in real terms when I stupidly bought a house in the mid-morning of my working life, and while I have had three decades to make stupendous mistakes, no financial error gets anywhere near the magnitude of that cock-up. The UK housing market is a heartless mistress – funded by an army of BTL sugar daddies I regret to say are my age fleecing the young, themselves in servitude to Britain’s rapacious financial industry it will eat you up and spit you out in little pieces.

    Your lucky stroke is that your ambition so outweighs your means that lenders will probably save you from yourself. Invest wisely, though do have a little bit of fun to celebrate the old girl’s passing. First see to your emergency fund of six month’s wages, held in cash probably with Santander to get some interest. Then invest the rest in a S&S ISA index fund and forget about it for five years.

    Your position is not hopeless. Inform yourself about the credit cycle, and the things that drive house prices. Do scale back that housing ambition – you may well want a four-bed house to raise a family, but hopefully there will be a lady of the house who can help with the finance.

     

    Notes:

    1. one of the advantages of being an ermine is is doesn’t matters if your fur turns white, because that’s what it’s meant to be
    7 Sep 2015, 4:07pm
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  • house prices – finance grabs punters by the balls with the invisible hand of the free market

    Housing is the third rail of British investment classes, and I don’t usually go there for the simple reason that I don’t invest in it.

    However, I never really spent much time working out exactly why this asset class is so heady and dangerous. I spent a lot of time looking in the rear-view mirrror working out how it hurt me, examining how, after 20 years of actually paying down the mortgage I had just about broken even relative to the estimated cost of renting, and how terribly front-loaded the risk was – I got away with it because I stayed in the same job for 24 years and bought that house six months into that job.

    Even Monevator declared the asset class overvalued and he’s not a fellow who likes to let on that crystal balls have their place at very rare times 🙂 Although I am still chortling about this –

    by the 1980s they could begin amassing the property wealth they have today – aided enormously by the right-to-buy and buy-to-let booms that the current Government is only just applying the brakes to.

    Not me, mate, I took the sucker punch here and I’ve read the early 1990s news reports that predate the Web where 3 million of my compatriots were in negative equity. The specifically housing part of my networth is probably less than a tenth of the total, and I own half the equity in the house outright (Mrs Ermine owns the other half, not a bank 🙂 ). I do own land elsewhere that roughly doubles that, arguably my property asset class worth is about a suburban semi . Before Londoners start to spit bricks and think the Ermine is on the Sunday Times Rich List, remember that house prices in the provinces are much lower than in London.

    As an aside, I’m intrigued by the result of 80 years of peace in Europe leading to the nonchalance of

    it could eventually be the country I live in. The gulf between what you can buy in the UK and in the great livable cities of Europe is staggering.

    The ermine is a jittery fellow, and even if we discount Brexit, I hear the distant drumbeats of serious social unrest in Europe. Sometimes it takes an outsider to clarify the matter

    At different times and for different reasons, all of the large European states—the United Kingdom, France, Italy, Germany—have blocked attempts to create a common foreign and defense policy, and as a result they have no diplomatic or political clout.

    They haven’t wanted European leadership, and most of them wouldn’t have wanted American leadership either, even if any had been on offer. The richest economy in the world has a power vacuum at its heart and no army. Now the consequences are literally washing up on Europe’s shores.

    But that’s not the point of this post. It is the discovery of the cogent rant linked to here in the comments of Monevator’s Yes, we do have a house price problem article. Unfortunately it’s far too long, so my service here is to summarise some of the observations in a post that is too long but a hundredth of the size:

    In an industrial consumer society, shelter is the one basic Maslow need most people buy on credit

    1402_Maslow's_Hierarchy_of_Needs.svgTake a look at the bottom two layers, which are basic and fundamental needs. Most of us don’t buy food on credit – cash is king here, from income. If you do buy love you probably use cash too 😉 Unlike in the US, healthcare is free in the UK. Although I am sure that there are many who would like to try, we don’t currently charge for air, and most people pay for water as they go along too.

    Unfortunately there’s one big item that addresses homeostasis, sleep, security of body etc, and that is shelter from the rain and other hazards, in short, housing. A hairless mammal in a Northern European climate needs a home. The vast majority of people, on leaving the parental home, are not rich enough to buy a house outright. They need to borrow most of the price.

    The free market fails dismally where everyone buys an essential product with credit

    If I want to buy a pound of apples, or a car, markets work well, because what is called market substitution happens if suppliers price-gouge. I switch to oranges if apples are too dear, I use public transport or a bicycle if cars are too dear. In this way the balance of power is matched – if the buyers are too tight the product is withdrawn from sale because producers don’t find it worth their while, if the producers want all the money the buyers disappear. Adam Smith’s Invisible Hand does its job well when everybody can walk away and do without. When you can’t, the Invisible Hand grabs you by the balls and your heart usually follows. Nowhere is this clearer than with housing.

    more »

    24 Aug 2015, 9:49am
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  • BTL Investors discover the problems of leverage and tax arbitrage

    It’s good to take a short break from the exciting carnage on the stock market and sink some needle-sharp teeth into some egregious special interest pleading. Maybe I’ve be offered an opportunity to buy the FTSE100 below 6000 by the time I’ve finished this 🙂 5000 by the end of the day – or maybe next month… Happy days are here again

    It’s an evil market all round, British property, and the Torygraph has taken up the cudgel on behalf of Britian’s overleveraged and undertaxed BTL investors

    What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income.

    The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

    Let’s actually parse this bullshit, and translate it

    Middle class savers seeing property as a one-way investment, borrowed shitloads of money they didn’t have to ‘invest’ in an illiquid asset class, and now whinge like drains that they can’t claim back tax on their borrowings. Some of them even whinge that their kids can’t get on the housing ladder without spotting the irony. (okay I added the last bit about their kids)

    Well, welcome to the real ‘king world you greedy sons-of-bitches. I can’t waltz into a bank, borrow £200,000 and plunk it down on stocks, claiming back the tax I pay on the interest either. Diddums. Indeed, the horny-handed toilers who just want to buy a house to live in the damned thing don’t get to claim back the income tax they paid on the money they earned to pay the mortgage interest, so exactly why you demand the privilege so you can soak tenants better beats me. Once upon a time buyers could do that, it was called MIRAS and that was iced fifteen years ago because it simply led to higher house prices because people bid up to what they can afford.

    Connie, a BTL 'Landlord' where the bank owns three quarters of 'her' property portfolio

    Connie, “my five properties were my pension” a BTL ‘Landlord’ where the bank owns three quarters of ‘her’ property portfolio

    Let’s hear it from Connie

    I never thought that mortgage interest, which I regard as a cost, could be taxed as though it were profit.

    How delightfully tragic, my dear. You know the poor little people you beat for the sale, you know, Joe and Josephine Smith who were actually going to buy that house to live in it? They were going to pay the tax on their mortgage interest, so WTF makes you such a special case, eh? I haven’t actually asked them, but I guess they also regard it as a cost, FFS.

    The fundamental problem is that if you have to borrow money to ‘invest’ then you are a hair’s breadth away from destruction. Plus there’s the wider issue – exactly why were we tax-subsidising people to borrow money to royally screw up the already deeply borked housing market in this country?

    There’s nothing fundamentally wrong with being a landlord, if you have the capital or your business model works given the cost of capital at normal commercial rates. But if you need tax breaks on the cost of capital to make your business model work, then you are being subsidised to piss on your tenants who can’t get that tax break, and it really is high time that perverse incentive is stopped. The Torygraph listed a whole load of special-interest pleading, but it’s basically on behalf of people who have invested in an undiversified, illiquid asset class on margin to become rentiers 1. It’s just not the same as buying productive plant and machinery to make more widgets better, where I can see the case to setting interest paid against tax.

    Undiversified, illiquid assets, and margin are not hallmarks of prudent middle-class savings, this isn’t something suitable for widows and orphans. If this is your retirement strategy and you’re an average grunt rather than Nathan Rothschild, and you think of it as prudent, well, we’re not in Kansas anymore…

    Notes:

    1. I don’t have a particular problem with people being rentiers, but you have to have capital to do it. If you can’t afford the entry ticket, then work for your living instead, rather than trying to arbitrage a tax-privileged borrowing situation relative to your tenants, because, well, you’re vulnerable to the loophole being closed 😉
    29 Oct 2014, 11:01am
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  • Financial Foolhardiness is Forgivable in the young, not old Fogeys

    It’s perfectly understandable at 12 to want to have your cake and eat it, but unseemly after middle age. Taking an interest-only mortgage when you’re 30 is naive, but having one when you’re 60 is wilfully ignorant. The Torygraph seems to be metamorphosing from the journal of retired generals to cheerleader for those growing old disgracefully and a representative for their greedy children. So they fulminate on behalf of the wilfully ignorant

    Take your mortgage to the grave, older borrowers told

    Around 130,00 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average, according to the City watchdog. One in 10 borrowers have no repayment plan in place at all.

    It was in the mid 1990s that warnings of endowment shortfalls started going out. I know because I got one of these. So I got on the case of the endowment firm and eventually pursued a claim against them for selling a single fellow a life insurance product. But I was a dumbass, and realised this so I started to overpay the sucker! The eventual result was that this contract I had so foolishly entered to in 1989 which was due to come to the end of its term in February 2014 was discharged early. There’s a case to be made that this is a vaguely stupid thing 1 to do for an early retiree with no income for a while wanting to defer his pension, but fair enough.

    Now there isn’t anything fundamentally wrong in taking out an interest-only mortgage in your 30s as you are buying for the first time, if you expect to earn more as time goes by, or indeed spend less. From a high-level tragedy of the commons viewpoint it is a stupid thing for us to do collectively; if Help to Buy, interest-only, shared ownership and all the other methods of paying more than you can afford for a house were disallowed, or we had decent credit controls, then the market would settle at a level that most buyers could actually afford. But that’s a different story.

    So the latest that somebody could take out an interest-only mortgage without being aware that this is the purest form of renting money from a bank is probably 2000, and these are presumably people whose parents look like this

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    if they haven’t jumped to the fact that they have a serious problem when more than halfway through the terms of their mortgages. If they haven’t paid off any of their capital, then they are living beyond their means, and we all know from the old boy Mr Micawber what happens then

    Result misery

    Now it is true that you get a bit more hidebound as you get older, and you become  more reluctant to up sticks and move. The human animal is a wondrous marvel of evolution/chance/creation, something, anyway. You really owe it to your forebears to honour all the work and the chances they took to create a rich, First-World country where you have many things that people used to sweat for handed you on a plate to make use of that to at least try and become wiser as you get older.

    So if you want to stay in the house you raised your children in, rattling around the empty spaces full of memories then damn well pay off your mortgage, because ownership of an asset gives you control. If you don’t want to do that, then FFS downsize, if only because that house you raised children in could be used by people of your children’s generation to raise their kids in, and you will find it more and more expensive to heat, clean and maintain unless you are rich enough to pay over the odds for your consumption.

    Speaking on behalf of the greedy children, the Telegraph asks

    Would you agree to die in debt?

    What’s actually wrong with that? Why the bloody hell not – it isn’t like the debt would be a claim upon the assets of your heirs. Obviously they don’t get to inherit anything, but there isn’t anything that terrible about this, from the deceased’s point of view. What’s wrong with it is the wider picture. If you’re of working age, no money and live in a house you don’t own  that’s too big for you then people will give you a hard time until you move or  become rich enough to afford the privilege. Get past that, even if you rent your house from a bank and not a landlord, then you are home and dry.

    We flog ourselves to tie up such a large part of our lifetime earnings in a mute capital asset largely because we haven’t worked out a better way of manage the physical assets of the world for the transitory existence of humans 2. In the UK, the renting a house option is so heavily loaded it’s a ghastly alternative to renting the money. An interest-only mortgage is a good way of getting better security of tenure, because paradoxically the 25 year terms on renting money from a bank seem to be a hell of a lot better than the six months AST terms on renting a house from a landlord. In which case why not rent the money, but the 25 year term still comes to an end one day.

    The Torygraph is wrong:

    Experts said lenders were compromising by creating lifetime mortgages which allowed older couples to stay in their homes if they promised the keys would go to the lender, rather than a family member, on death.

    However, borrowers should see the new mortgages as a “last resort”, the experts said.

    They think this is terrible because the kids don’t get to own a family asset that was never in the family in the first place. There’s nothing wrong in penalising foolhardiness in the old. Folly should have consequences. If you want to featherbed your kids and not have to move from the family home/ancestral seat of residence then FFS go on fewer cruises and pay off your mortgage, it’s not hard to understand!

    Notes:

    1. There seems to be no limit to ways a Ermine can screw up anything that involves property but I don’t regard it as a calamity and I’m prepared to pay for my folly by paying 5% on the money I borrow for a few months rather than 2% on a mortgage
    2. The luxury watch brand Patek Philippe had an ad running  “You never actually own a PP. You merely look after it for the next generation.”  The ad is absolute poppycock targeted to aspirational wannabes but could be applied to houses, or the world – anything of value that lasts longer than a lifetime. Houses in the UK can last four or five human lifetimes before they become slum clearance, so having to own the whole thing is inefficient in some ways
    11 Apr 2014, 4:36pm
    housing
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  • Mortgage income multiples and affordability

    One of the ways people are finding to pay more for houses is to switch from the historical use of income multiples to the new measure of ‘affordability’. The former gives the wrong answer, but the latter is great. Progress is good, but it’s worth understanding. When I bought my first house in 1989 mortgage providers would qualify a prospective mortgagee by asking how much did they want to borrow as a proportion of their gross salary 1. You’d typically get a mortgage of 3.5 times a single salary or 2.5 times joint salaries in the case of a couple.

    These sound low today. To the extent of being unworkable at current house prices for most people. It made sense 30 years ago, because Britain had just come off a run of double digit interest rates, personal taxation was much higher (the personal allowance nowadays is over a third of the median salary of £26,000, it was lower relative to salaries in the past). It is instructive to observe the relative proportions of mortgage interest and capital repayments over the typical 25 year period at 10% interest rates and the current ~2% rates.

    You spend much more time repaying capital at 2% APR

    You spend much more time repaying capital at 2% APR

    Compared to, say, my mortgage career at higher interest rates

    you pais a higher absolute amount relative ot the price of the house, and you pay interest for longer in the old days

    you paid a higher absolute amount relative to the price of the house, and you pay interest for longer in 1980s/1990s

    Which is much more like the canonical sudden rush of repayment towards the end that we used to know and love. When you tot up the total amount repaid, the 2% fellow pays 3*gross or 4* net salary, the 10% guy pays 7*gross or 9* net salary 2

    There’s clearly some case to be made for increasing the income multiple – provided that interest rates stay the same. After all, if we say I was paying the long-run British average of about 6% interest rates over my working life, then had I been earning the average wage, I’d have sunk 6*net/5* gross wages into my house 3. If it’s all different now, and low interest rates are here to stay, then it’s perfectly justified to sink twice as much into a house. In the end it’s what you pay over your working life that matters, and at lower interest rates the total amount paid is less.

    So bring it on, let’s run at twice the income multiples that were lent to people 25 years ago. That’s 7* single income and 5* double incomes. Now 7* median single income will buy you my house I believe, so the residual 10% gives you room to may the parasitic costs of moving and all the hangers-on.

    This isn’t recommendation or otherwise. Housing still rates as the greatest finance screw-up of my life, so what do I know 😉

    Thing is, it’s all different now are the most dangerous words in finance. Secular changes takes years to take effect. QE can’t last for ever. If you’re looking to buy a house as a first time buyer, you may not like Buy-to-Letters who are essentially front-running your heart’s desire. But say what you like about them, they’ve probably got a fair awareness of the mortgage market.It’s the oldest law of the jungle – when the big beasts start looking nervous it’s worth knowing why…

    Some of the BTL guys are running scared and fixing

    And it appears some of them are running scared and remortgaging now. Had I bought just three years later, the Ermine would probably be a buy-to-letter with a deep belief in the value of housing rather than still feeling it was a Weapon of Mass Wealth destruction – one’s early experiences with an asset class tend to be formative. However, I have recently seen younger BTLers come a cropper with the usual problems, underestimating the effect of voids, and underestimating the chavviness and lack of character of some tenants. As a tenant years ago I only saw the lack of character of landlords, but it seems to cut all ways. The residential housing market seems to bring out a particularly nasty streak in the British psyche – buying and selling houses is pretty horrible experience too. BTL landlords seem to need significant capital resources, and preferably a number of BTL properties to average these lumpy setbacks.

    It probably is a bit different now…

    But not as much as to justify a doubling of price to earnings. 4 or 5 time single, maybe. The double salary premium might go up a little bit more – mothers return to work quicker now than they used to. Let us postulate that it’s all different now. Mortgages are given on an income multiple of 7 times single salary, but it is required that you have a 10% deposit (ie 90% of the purchase price is advanced to you). Sounds fair enough?

    Let’s take a look at what your monthly repayments would be like, assuming you’re on a standard variable rate, ranging from the 1% it’s around now to the 14-16% at the high-water mark of what I saw in my mortgage career.

    your mortgage payments as a function of annual interest rates

    your mortgage payments as a function of annual interest rates

    at 15% you’re paying out more than 90% of your net pay in mortgage. Nothing left to pay bills, council tax and you had better become a breatharian or start scavenging food from bins like Top Cat. Note that you don’t have to see sustained rates like this for several years. Just a couple of years of that can slaughter you unless you have significant savings behind you. It all boils down to the usual question.

    I’ve been there – well less than that, but I’ve spent more than half my net pay on the mortgage.

    If you’re going to start down that track then at least know what the enemy looks like. This has nothing to do with negative equity, it’s straight interest rates. You need to either have savings, live more frugally, or get a payment holiday. Those savings need to be about two years of running costs. Then it’s a fair gamble, because after two years of 15% interest rates Britain will look very different. The general misery would be such that some government would probably have to do whatever it takes to reduce them, or start dropping money from helicopters 4.

    an old idea from 1969

    an old idea from 1969

    Your aim as that homeowner is to be still standing when all the people around you have been repossessed.

    It can be done. But it’s rough being the house between two evicted properties. You do start to wonder when it’ll be your turn. It’s no fun at all…

    Frugality is the solution there; by definition. If you were earning more then your earnings multiple would be lower. It’s not something that sits easily with expectations now. And God help you if you have any other debt.

    Income multiples will matter again if interest rates rise to historical norms of ~6%. Mr putative 7 times net  income multiple will be paying ~50% of his income on the mortgage.

    Methodology

    This spreadsheet. I calibrated it against this calculator and derived the formula from Francis Webb’s Mortgage interest calculator template. 5

    I’m done with property now. Even after 25 years the thought of residential property as an asset class brings me out in hives 😉 Good luck all and be careful out there.

     

    Notes:

    1. The rationale for gross salary was Mortgage Interest Relief At Source(MIRAS) allowed you to pay the interest from pre-tax salary. Barmy, I know, though notably the United States still has mortgage interest on residential property as tax-deductible I believe
    2. I have assumed the 3.5 times multiple applies to net salary since you don’t get MIRAS any more
    3. I earned more than the median wage for nearly a lot of my working life, so this isn’t that bad. However, I am looking for the scale factor, the old mortgage income multiples were workable, many people have paid off their mortgages from then
    4. Milton Friedman, 1969 The Optimum Quantity of Money And Other Essays
    5. I regret to say that I didn’t bother trying to understand the function, simply copied it and tested it against Monevator’s calculator. It was too nice a day to wrangle that sort of detail, so as long as there isn’t s systematic error across both sources it should be right 🙂
    6 Apr 2014, 10:40pm
    economy housing personal finance:
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  • The Ghost of Negative Equity will stalk the land again – a cautionary mortgage tale from 25 years ago

    What was the dumbest thing an Ermine has ever done in personal finance?

    I bought a house in 1989. With an endowment mortgage, a 20% deposit and a 10% interest-free loan from a credit card, which I paid back. The how isn’t the mistake, though it had errors. It’s the when. 1989, and early in my working life.

    You can’t go wrong with property. everybody needs somewhere to live. Safe as houses

    Bollocks, says the Ermine, with feeling

    This is a story from a distant front line for first-time buyers in the first half of their working lives. No prediction about house prices is made or implied, because the market can stay irrational for longer than you can stay solvent.  Most of us will only get three quarter-centuries in our lifetimes, and the first 25 years is wasted on learning how to drive the world, from the mewling and puking stage to young adult, ‘cos humans are slow learners with grand ambitions.

    Of all the financial asset classes out there, residential property is exceptionally evil, because we buy the asset class in the first half of our working lives, with borrowed money. For the simple reason that we want the byproduct – it gives us somewhere to live.

    If you’re over 35 and think Buy To Let when you hear “house” don’t bother reading this. You are much better capitalised than a FTB, you have more experience, you can make your own risk assessment, and quite frankly if it all goes titsup you have only yourself to blame.

    The Ermine is the Ancient Mariner

    The Rime of the Ancient Mariner

    In Coleridge’s The Rime of the Ancient Mariner the Wedding Guest hears, but does not understand. I was once that Wedding-Guest, in 1989 – people did suggest to me that it might be an unwise time to buy, what with all the frenzy of MIRAS 1. But that’s the trouble with housing, you WANT IT, WANT IT, WANT IT so bad. RENT IS THROWING MONEY AWAY, MUST MUST MUST get on the HOUSING LADDER. So you lose your mind. If this tale is a warning for you, you will not heed it, such is the way. But like the Ancient Mariner, I’ll tell it anyway.

    1404_hamsterwheel

    what the housing ladder seems to look like

    I’ve told it before in February when my original 25 year mortgage would have been due, but this one has added analysis to show just how badly it could have gone wrong. Imagine, for a moment, some starry-eyed young pup in the pub talking to his mates

    I’m going to borrow a shitload of money – five times my gross salary, if you please, and I am going to stick it on the stock market, in a FTSE100 tracker.

    Hopefully they’d wrestle him to the ground, or at least ask “are you crazy, man?

    Same pub, same bunch of mates, and he goes “I’m going to borrow five times my salary, and I’m going to buy a house

    And everybody around the table goes “hey that’s fantastic, congratulations you’re getting on the housing ladder, woot” and high fives him.

    Jenn Ashworth

    Jenn Ashworth

    The Grauniad’s personable Jenn Ashworth tells us that by 31 she’s had 14 addresses. And she’s sick of it. Sorry, dahlink, it’s not that unusual. For an ermine that was

    1. parents (SE london)
    2. Southside (Sth Kensington halls of residence, now demolished)
    3. Earl’s Court shared room three storeys up, gas appliances defective – you lit the oven throwing lighted matches into it
    4. Knightsbridge bedsit sublet from someone who did a runner with three month’s rent. The ermine learns that people steal money
    5. Different and crummier part of Earl’s Court
    6. short stay with parents – 1 hour commute to work, then when I moved to the BBC a 3 hour commute to work. enough to get me out ASAP into
    7. Acton Town house shared with four other guys, deposit stolen by landlord, shower powered off lighting circuit so I had to isolate before getting killed/burnt down.
    8. Southampton student accommodation (I took time out to do an MSc)
    9. Alperton shared with 2
    10. Ealing 2 bedsit infested with black slugs. One month’s rent stolen by landlord
    11. Ipswich digs 1
    12. Ipswich digs 2
    13. first Ipswich house this article is about. This is only the second time I had my own toilet and bathroom 😉

    I was in my late 20s then. Having lots of addresses goes with the patch of being young 😉

    How did buying a house all go wrong for me?

    Thatcher and Nigel Lawson

    Thatcher and Nigel Lawson

    Let’s cast our mind back to what the world looked like in 1989. Nigel Lawson hadn’t discovered climate change or that money was to be had in denying it but he had discovered money, he was Chancellor. There had been a boom going on ever since the end of Thatcher’s first recession (1980-82), the young Ermine had switched jobs a few times as you do in your twenties and discovered that while London was a fantastic place to be young in I was never going to be able to buy a house unless I got a better job than design engineer for the BBC.

    So I left to come to Suffolk and work for The Firm, at the time a premier research facility for a FTSE100 company. Fantastic place to work, the pay was better and houses were cheaper less expensive than in London.

    Young ermine to world – what is this Boom and Bust you speak of? I have no experience of that, so it doesn’t happen…

    You know how kids are absolutely convinced you can’t see them if they can’t see you? Well, that sort of thought error doesn’t always stop at 11. I graduated in 1982 into Thatcher’s first recession. All I had seen over my working life was an improving economy. I started in the pits of six months of unemployment as the economy slowly crawled from the wreckage, then getting the first real job, all around the gradual upswing was the backdrop of what I expected of the economy. So I rock up in 1989, and house prices are rising, the economy is booming, everybody is feeling chipper.

    25 years of high living has taken its toll on our Nige. presumably the Domestic Goddess got her looks from her mother :)

    25 years of high living has taken its toll on our Nige. Presumably the Domestic Goddess got her looks from her mother 🙂

    That Lawson bloke says he’s going to stop couples getting mortgage interest relief at source. At the time the Ermine was not wise in the ways of the world, so I didn’t join up the fact that this would give everyone Torschlußpanik thus increasing demand for a short time, leading to a ramp in price 2.

    That sounds incredibly dumb, now. In fairness to my new colleagues, several of them did even highlight that possibly there might be distorting effects due to this policy which might be something to think about. However, in one’s late 20s you’re so flushed with the grand victory of having spent your first 25 years successfully getting a handle on how the world works. And you haven’t had the stuffing knocked out of you by discovering that your map of how the world works has holes, and by itself doesn’t track changes in the world. So you are smarter that everyone else and invincible. The good news for me was I made that class of mistake at the wheel of personal finance, rather than at the wheel of a car…

    So I bought that house. With an endowment mortgage, if you please. Single man, no dependants, so the life insurance aspect of the endowment was worth sod all to me, and The Firm’s pension offered death lump sum anyway. A dead young Ermine would have been worth a lot of money to someone.

    My parents, bless ’em, had done their bit for my financial enlightenment – although it seems that these days parents don’t bother to share the hows and whys of personal finance mine did.  I knew how mortgages worked and what the difference between and endowment mortgage and a repayment mortgage was. Hell, I even knew what the NAV of an investment trust was and how it could be at a premium or a discount, though I wasn’t to use that knowledge for 20 years. And had been educated in no uncertain terms that an endowment mortgage was a dipstick sort of move. But hey, the LAUTRO saleswoman had pretty green eyes and how can you turn down the promise of a 3x lift on the expected endowment outcome 3? It sounded good to me! That’s the trouble, you can know something but not understand it. You can teach knowledge, but you can’t teach wisdom, because wisdom is integrated knowledge. I had always seen things getting better throughout my working life, so I knew that house prices were always going to be rising relative to wages, and I feared getting left out.

    1404_2ITNow some of that knowledge was correct, but not for the reasons I understood. House prices were rising relative to wages because of the increasing entry of women into the workforce since the 1980s. Prior to that, a household typically used the man’s wages to pay the mortgage from, but all of a sudden households had more resources available to them, with two incomes coming into the household. What they did with that is throw it down the toilet of inflating house prices, so houses got dearer relative to wages, and everybody moans how hard it is to have children and afford a house these days, because more of the combined household capacity to do work is focused on paid work outside the home. Don’t shoot the messenger – Elizabeth Warren’s book first highlighted to me exactly why I struggled so hard to raise the cash to buy a house. I was a single man, at a decent job, with a 20% deposit and in interest-free loan of 10%. I was fighting couples with two incomes, and that’s not a fair fight, hence the difficulty.

    So I purchased the house, settled in, had all the usual shocking costs you have when you buy your first house because you have no furniture (I bought mine secondhand), you have no tools, you have precious little physical capital. I was paying 6.5% on the low start (ARM) loan 4, and paid back my interest free credit card loan in one year, as required. What I didn’t pick up was that there was a shitstorm. Incoming. Take a look at this

    the total costs and savings associated with buying a house. £ on the lHS, % on the RHS

    the total costs and savings associated with buying a house. 2012 rebased £ on the LHS, % on the RHS. It also explains why the greybeards have all the money…

     

    It covers a period of a little over twenty years, and shows the inflation-adjusted to 2012 prices equity, payments and imputed rent of an ermine’s first house 5

    Now every bugger tells you you can’t lose on houses. Take a look at the equity blue line, which shows the difference between the house price tracking the index for that year and what the purchase cost was. For ten long years that line is negative. You can’t lose on houses. Until you do, and then you lose big-time.

    In negative equity you cannot move, must not lose your job, and must keep paying the mortgage

    Because if you don’t, you get evicted from ‘your’ home, and to add insult to injury, they flog it at a knockdown price, and unlike in the States, they still come after you for the difference. It happened to my neighbours and a few other places in the street. The mortgage company comes along, sticks a notice on your window that this property will be foreclosed on such and such a date, and you’re out on your ear. Oh yeah, and you still have a mahoosive debt that follows you around like a lost dog.

    What do all those coloured bars mean?

    Although everybody talks about houses as if they were a financial investment and part of your free cash flow, only BTL landlords buy houses as a straight financial investment. The rest of us buy them to avoid paying rent, and give us a place to put all our stuff, watch TV, make love, raise children, all that sort of thing. You can do all that in a rented place too, but since you ‘own’ a house you don’t have to pay rent on the house. Instead you get to pay rent on the money you bought it with. So instead of throwing it away paying it to a landlord you throw it away paying it to a bank.

    The red bars represent all the cumulative money I saved through not paying rent to some shyster landlord, estimated at about 4% of the Nationwide adjusted house price and then scaled to 2012 prices by inflation. It is possible these should be adjusted to interest rates, in which case I understate the cumulative benefit of the rent I didn’t pay.

    The blue bars represent the cumulative excess that I paid over and above the cumulative amount I would have paid in rent to a landlord 6, because I am paying it in rent to a bank. This is also adjusted to 2012 pounds, like the rent. I am buying a great big wodge of Stuff, so obviously it’s gonna cost me more than if I just rented the usage of it for 25 years. You can see that even after 24 years I’ve actually still paid out more than I would have done if I just rented. This conundrum is basically why you rent when you are poor. It’s cheaper, and that was particularly the case at a time of very high interest rates, of which more later.

    The lime green bars are the equity in the house, the same as the blue line, but tossed on the debit or credit side of the ledger as appropriate.  The value of the rent is the value delivered by the asset, and looking at the blue lines which are the excess paid over the value gotten as rent I would estimate break-even in about 25 years. However, since this is an asset that increases in value and is bought with borrowed money I actually broke even in 2001, when the increasing value of the house added to the accumulated rent I hadn’t paid beat out all the money I had paid to the mortgage company. Note in 2001 I don’t own the house as of yet, it’s just that I could theoretically sell up and breathe a sigh of relief that I hadn’t paid more than if I had rented.

    Why was that such a big mistake?

    I stayed put for 10 years. Now imagine all the shit that can go on in a life.

    • You can lose your job. There was a hell of a recession on in the early 1990s. Look at what would have happened in 1993 – I would have been foreclosed, would have lost £20,000 in 2012 money, would be bankrupt and without a roof over my head. No fun at all.
    • If you buy the house in your early 30s the pitter-patter of tiny feet tends to happen in the next decade. Tragically unromantic, but the years after the first child are high risk years for relationship breakdown. If your house is in negative equity you’re going to take a big hit at a rough time
    • You have to move for work. Now you get to rent your house out and rent another. There are parasitic costs and voids associated with renting a house out

    I was single when I bought that house so I avoided 2 but the other two scared me. For a long time. This graph simplifies things so I assume I have a 100% mortgage. I was dumb, but not that dumb. I had a deposit and an interest-free loan from MBNA, to the tune of 30%, but even so I was in negative equity till about 1995. Negative equity kills you fast and kills you good, because of the leveraged way we buy houses.

    Was it just an ermine that got this wrong? No, apparently a million other dumbasses had such an awful sense of timing as I did – but this newspaper article is from 1992, so still in radio silence on the Internet, because the WWW started in 1994.

    With roughly ten million mortgage holders, that means that more than one in ten people with mortgages are trapped by debt. They are unable to sell till prices go up. They can’t sell and are stuck. [UBS Phillips & Drew]research analyses house price falls and the number of first time buyers, the group most likely to be in trouble because at least 50% of them took out mortgages of more than 95% of the value of their home.

    Rachel Kelly,  “A million first-time buyers caught in mortgage debt trap.” Times 24 Apr. 1992: 4. The Times Digital Archive

    I had a 30% deposit (ie a 70% LTV). That wouldn’t have helped me in the suckout, though it did shorten the period of negative equity relative to that shown on the chart, by shifting the line up a bit.

    So how does that affect Mr Wannabe 2014 house buyer? Houses always go up. Everybody says my house is my pension.

    To be honest, I don’t know why everybody says my house is my pension, though RIT has a good take on that subject. It would scare me shitless if I had housing as a large part of a pension, because you need several houses in different areas to get sector diversity, the baby boomers are going to die off in the next 20 years so their houses will be sold and it’s hardly like I’ve seen property as a great wealth store. Everybody else has it as a religion and who am I to criticise other Britons’ religion as long as they leave me be. Fill your boots guys.

    If they’d bought a house worth of the FTSE100 on the same leveraged basis and paid their rent with the dividends they would probably be saying the FTSE100 is my pension. It’s buying a long term appreciating asset with leverage and not trading the bugger come what may and not getting marked to market in suckouts that makes houses a good investment – if you stay the course and don’t take those hits in the early days. Look at that chart and note that buying on a high meant I was exposed to the risk of having to sell up and having the house marked to market at a loss for a third of my working life. Safe as houses, guv, safe as houses.

    The cyclical rises and falls of the house prices are slower than those of the stock market. Just because it’s a quarter of a century from the last turn of the cycle doesn’t mean it’s all different now, like the mills of God this one grinds exceedingly fine and exceedingly slow… 25 years ago jobs were more stable for the average employee, waiting to pass through the meshing gears of the mill until they turned you out the other side was a realistic option. But look at that 10 year suckout. It’s one of those questions you gotta ask yourself, really…

     

    So what is different this time? It’s not about price, it’s about affordability!

    Monevator observes that the house price to earnings ratio is creeping up. Some of the ideas about increasing ratio of two-earner households resonate with Elizabeth Warren’s book about the US situation. So obviously the whole price to earnings metric is hard to make fit these days. The new in word around town is affordability. Don’t worry about the amount of money you are borrowing, that’s just a number, it doesn’t mean anything. Can you afford to pay the mortgage okay?

    Now if someone waltzed into a shop selling LED TVs with a credit card and said that, it would be viewed as a personal finance faux pas. Do that for a purchase three orders of magnitude bigger and suddenly we all go hey, that’s cool, don’t look at the price, can you make the repayments?

    There is a case that the 3 x single, 2.5 x double income multiples that were the maximum lenders would advance in the past are too conservative now. 25 years ago we were coming off long runs of double-digit interest rates from ’78 onwards. That sort of thing limits the amount of mortgage you can pay off in a 30 or 40 year working life; 1991 was the last time interest rates were in double figures, so for 20 years they have been lower. But the average is closer to 5% than the 0.5% they are now.

    I kind of feel the need for Clint again. Take a look at the yellow line, interest rates. Now just like the young ermine didn’t catch on with this whole boom-bust kerfuffle, because he hadn’t seen it, there are no doubt people who are thinking

    what are these double-digit interest rates you speak of? I know nothing of such fiscal brutality

    Look at the chart. Most of the time it spent at the long-run value of British interest rates of 5 or 6 %. That has a direct bearing on your affordability. The young ermine, though foolish in many ways, had the sense to ask of the mortgage company what would repayments be if interest rates doubles. It’s actually quite easy with an interest-only mortgage which is running alongside an endowment. If the interest rates double, you pay twice as much per month 😉 I figured I could managed that, just. I didn’t expect to be doing that, the very next year. I froze in that place. I didn’t go out much. Then the high interest rates started to depress house prices, and it began to dawn on me that I had made the most stupendous personal finance mistake of my whole life.

    It dwarfs the second biggest PF cockup I made, which was a rash two years of major momentum-chasing and trading muppetry in the dotcom boom and bust. I only used ISAs and wasn’t rich enough to fill the first one. I probably destroyed about £7000 worshipping at the altar of Buying High and Selling Low, with a side order of Excessive Churn. I blew about £10,000 in 2012 pounds, but I got something of value in return. Education – it made me ready to learn how to go about things better. There was no bias or scamming in the training course that Mr Market dished out, and more to the point I threw away the money as I earned it. I didn’t borrow it from a mortgage company, and once it was gone it was gone, but I didn’t owe it to anyone.

    The stock market has been a lot kinder to me than the housing market, and in a much shorter time, too. True, it delivers a jolly good kicking every so often, there aren’t the slow languorous cycles of the housing market. Perhaps the background radiation of this epic fail remains in my personal finances, because unlike the case for most Britons in my age and ex-income group, my house is not the dominant part of my net-worth, excluding pensions, if I were irrational enough to compute it as part of my financial assets 😉

    Interest rates are at historic lows, that’s a good thing, surely?

    On interest rates we’re a little off the right-hand side, but interest rates haven’t budged since then. They’re at historic lows. They can’t go any lower, because otherwise the Bank of England would be paying us to borrow money from it. So when you are making the switch from price to earnings (3 x single or 2.5 * double ISTR) you are making a nasty little pact with Mephistopheles.

    you shouldn't be strinking deals with this bad boy. He tends to turn up and the most inopportune times

    you shouldn’t be striking deals with this bad boy. He tends to turn up and the most inopportune times to call in his dues

    You are making a bet that things really are different this time, and that for reasons you can’t explain, unlike over the last 25 years interest rates are going to remain at historic lows of a tenth of their long run average for at least the first 3/4 of your mortgage (19 years of a 25-year mortgage). You can afford for ’em to let rip a bit after that, because inflation will have reduced the value of your debt by about half then anyway, plus in an ideal world you’d have paid off some of the capital too.

    You’re also making some other assumptions. That your pay will keep up with inflation, which given the power shift from labour to capital may be unwise. That nothing untoward will befall your employment, or if so, then you will be able to find another job at similar or better pay without moving. Unless you live in London, that may also be unwise. If you do live in London you can’t afford to buy a house if you are a prole, or even one of the 99%. Then there’s the risk of the more personal crap that can get in the way of things – divorce, children dropping the second salary for a while and upping your costs. But hey, it’s affordable…for now

    You can see what an interest rate hike did for me. Obviously the heave-ho from 7.5 to 14% raised the payment, but it also made the aggregate payments much higher for a while. Look how fast the cumulative overpayments relative to renting ramped up (the blue bars). They only start to yield to the cumulative imputed rent in 2000 over half-way through my working life, and it is probably only about now that the total amount paid in mortgage costs is less than the total amount I would have paid if I had rented. Of course, I now have a fully paid-up house that has a future income stream associated with it – the rent I don’t have to pay.

    The risk of being hit by negative equity is highest at the beginning, when you are young, for the simple reason that you haven’t paid off any of the house yet. The amount of total money sucked out relative to renting is highest in one’s 40s. It’s not a personal finance trajectory that is for the poor, and not one that fits well with the costs of having children in one’s 30s.

    I can’t yet work out whether this cost peak is an artifact of having eaten that fall in house prices and the high interest rates early on. The fall in house prices is not reflected in the running cumulative costs, however, except as an effect on imputed rent 7

    what do interest rates do to house prices?

    George Soros - this bad boy did for the Ermine in '92

    George Soros – this bad boy did for the Ermine in ’92 by ejecting the UK from the ERM. Lamont skyrocketed interest rates to try and stay in

    They make them fall in real terms or at least reduce the rate of increase relative to inflation. Particularly in the Brave New World of gauging how much you will pay according to affordability, rather than a price/earning ratio. Affordability is inversely proportional to interest rates, so as interest rates go up, prices have to fall to stay affordable. You can see that in the negative equity that I suffered at the start, though this may be correlation with the long drawn out 1990s recession. The interest rate spike was cause by Britain being ejected from the ERM – interest rates were raised to try and stop the pound falling, but the Bank of England lost the fight. That is the trouble with economic variables – they are hard to separate and qualify individually.

    Why do governments push home-ownership so hard?

    Not all governments do. Not even all British governments did until 1980. When I was at school it was perfectly normal for middle managers to live in a council house. Then Thatcher got in, and it’s been a world of hurt from 1980 onwards. When I look at this I can’t help feeling that it is a rum way to run an economy and seems to do a lot of hurt to a lot of people trying to catch up with the shibboleth that you must own your own home. The huge exposure to risk when you are young, the massive suckout of money in one’s 40s to buy the house compared to the rental option. Is this really worth all the pain? At the moment it is because the rental option is really horrible – there is no useful security of tenure in the UK and the army of amateur landlords seem to be patchers and bodgers when it comes to maintenance. It seems the solution to complaints about the state of the place is to get a less discriminating tenant – it is a landlord’s market.

    If the government were interested in the maximum quality of life for the most people, it would stop fiddling about in the housing market and fix the alternative, renting. Most of the house-building in the post-war period was done by councils building council housing

    post-war housebuilding

    post-war housebuilding (BBC)

    and this carried on at a notable rate until it was shut down by Thatcher’s Right To Buy – there was no point in building houses with ratepayers money to flog them off cheap to somebody who was in the right place at the right time. Private enterprise clearly hasn’t picked up the slack, because presumably there is a profit incentive to maximise house prices for new-builds by controlling supply 😉 Or some other reason, but it’s clearly not happening.

    Renting in the private sector is miserable. If you favour the tenants too much you get misery for the landlords and then misery for the tenants who don’t have a place, though joy for those who do. If you favour the landlords, as is the general case now, you get misery for the tenants, and drive people towards owner-occupation who perhaps aren’t ready for the financial hit. Owner occupation is much more expensive for the first ten or fifteen years. Calculators like this make me laugh because they are simplistic, assuming a constant interest rate, and constant house price inflation and they also take the equity in the house on the plus side. The only time you get to see the increasing equity in your house is if you downsize. The next time is when your kids sell the house after they’ve come back from the crematorium. Even after 25 years I’m not sure I’m up on the deal yet as far as money spent on buying relative to what I’d have spent on renting is. I do have an expensive asset and I’m done paying rent and mortgage for the foreseeable future, so I’m better off overall. But it was an expensive ride and I took outrageous shedloads of risk. After all, nobody sat me down when quoting for a mortgage and went

    Now Mr Ermine, how do you feel about the possibility of losing 33% of the value of this house should you be SOL and lose your job in the first ten years?

    Saying yes to that sort of risk that puts you into Highly Adventurous nutcase levels with shares, and yet people become gibbering wrecks if it’s intimated to them that the stock market can do that to you 🙂 Safe as houses, they say, safe as houses… What the hell did the stock market do to get all the bad rap? A financial adviser won’t let you sit down and open your mouth without you taking an attitude to risk test, and yet you can blithely sign up for a mortgage and the only warning you get is

    Your home may be repossessed if you do not keep up repayments on your mortgage.

    No shit, Sherlock. No mention of the risk, eh?

    You are about to take the sort of risk that put a million buyers at risk in within living memory – the Bank of England interest rate is at historic lows and could increase tenfold without drifting out of the long run average. Have you thought about what that would do to your repayments, and have you had a word with Clint about it?

    Nary a word that this might happen

    Lindsay Cook Money Editor. "Coming to grips with negative equity." Times  24 Oct. 1992: 25

    Lindsay Cook Money Editor. “Coming to grips with negative equity.” Times 24 Oct. 1992: 25

    Housing is, however, not just about money. The excess cost of buying is probably worth it to get rid of AST tenancies, horrible landlords, one month eviction periods, shitty house maintenance and all the other hurt that often comes with amateur BTL landlords. Fixing the rental market probably means building decent social housing, enough to compete down rental prices and set standards, and relieve the pressure on the owner-occupier market. Owner-occupation is much less suitable for a world of shorter-duration or less secure jobs. I don’t know if Thatcher was right in her time but that world is long gone now.

    Of timescale-blindness

    We are scale-blind to extremely short timescales. That much is clear when you try and swat a fly, or watch a sparrow land on a blackthorn bush without impaling itself, as it makes micro-adjustments to its flight path to avoid the might spines. Listen to this whitethroat at normal speed – it sounds pretty scratchy and nasty to me

    Now listen to what that presumably sounds like to a real whitethroat, which can hear finer temporal detail than us. All I have done is slowed it by 8 times

    That’s still coarse on the sort of timescale that high-frequency trading works. You can’t stay on top of that. The effect happens at long time scales too, we just don’t see things that change over decades as much as we see them if they change day to day, which means that we become increasingly blind to groundswells in finance that have a longer period than a working life. Hence this article, it is a distant report from a receding event horizon. It happened, and it’ll happen again. What makes this worse is that the WWW started in 1994, so for the Internet generation this history is not accessible. I used my local Library’s newspaper search facility to research some of this, and it is uncanny how the themes from 1988/9 seem to be repeating themselves now, and how certain pathologies associated with mortgages seems to be evergreen. Such as stupid berks taking money out of their home equity in the good times to pump up their lifestyle only to come over all surprised when it all goes titsup in crashes. Life has rainy days in it. Save up for them.

    Should I not buy then?

    Markets can remain irrational longer than you can remain solvent

    John Maynard Keynes

    Search me guv. London, for a start, is a different place. I’m not in that league. I left London 25 years ago because I was too poor to live there. You’re competing against foreign money treating London real estate as a reserve currency, and there’s a lot more of the rest of the world’s 1% than there are Londoners. It’s not a fair fight. I could earn enough as a single man to fight the DINKY couples but the 1% are way out there, sometimes you gotta know when to hold ’em and know when to fold ’em. For most people London falls into the latter category.

    Elsewhere, you buy a specific house in a specific part of the UK, subject to local conditions. I personally wouldn’t buy right now, but then I haven’t lived with AST tenacies and scummy BTL landlords 8 for a long time. I can see how that makes people prepared to pay over the odds. Maybe it really is different this time.

    I learned something writing this and analysing the costs – in particular that when you buy a house with a mortgage you commit to ongoing higher outgoings for over twenty years – that’s real money you have to earn and pay out. It’s true that the break-even point was 10 years in my case, but my spending was still higher than it would have been renting to 20 years. The break-even point is brought forward by the nominal value of the house, which is only realised when you die or partially on downsizing.

    I didn’t have any idea when I started down the mortgage track that this was the case. I earned enough and was lucky enough to dodge the negative equity bullet to get away with it, but it could easily have gone a different way, and then the ermine would not have been retired. Safe as houses – think of those million people in negative equity in the early 1990s. I was started down this track of thinking by Paul Claireaux’s blog post on House Prices Now – he has some other charts of interest there, and a far better grounding in the financial technicalities, where I’ve just lived it. His summary?

    What I conclude – is that  (in broad terms) UK house prices have gone into outer space!

    There is a general message that when buying investments one should take valuation into account. That is doubly the case if you are going to buy it leveraged – and a house is one of the few assets Joe Public buys on margin. Negative Equity is what happens when you get that wrong, and being foreclosed, going bankrupt and having the debt chase you is what happens when you get that wrong and lose the ability to pay the mortgage. Only you can say if getting away from those crappy landlords is worth the risk.

    Notes:

    1. MIRAS is a historical piece of Government fiddling in the housing market being changed where they didn’t tax you on the interest paid on a mortgage. Interest rates and tax rates were much higher in the 1980s than they are now
    2. short-term Government interference leading to a pulse in demand just before an election. Any connection with Help to Buy is of course specious scuttlebutt and should be ignored. Of course.
    3. in those days money halved in value every ten years. So that 3 x lift was pretty much breakeven after 25 years with free investment risk chucked in, but optimism and being a smartass is one of the privilege of the youthful, eh. Boy was I taken for a ride 😉
    4. I used the low start loan so I’d have a chance to pay back that interest free credit card. It was the correct use fo an ARM loan – the young ermine got the details right, it was the big picture that I made a hash of
    5. To track the house value I used the Nationwide house price index for old properties, East Anglia section. The house was a two-up two-down built in 1840, the Nationwide are pretty accurate because scaling the price I bought at forward to 2012 gives pretty much the value Zoopla gives for a similar joint in a similar area. To track inflation I used the January of the year figures from this Guardian spreadsheet. For the Bank rate I took figures from the Bank of England and did the manual calculation to get the yearly interest rates, and assumed a mortgage was 1% more. I estimated rental prices as 4% of the yearly house price, which would fit for now. I moved around the middle of the period, so the second half of this is a simulation.
    6. I had to subtract what was already indicated otherwise the overall picture would be wrong. When the blue bars disappear, it will have finally been cheaper in terms of money paid out to have bought, not rented
    7. Update 22 April – a house just like mine has gone up for rent across the way, so I looked up how much it would cost to rent. The imputed rent assumption is pretty damn close, it’s nice to get a real-life confirmation of the cost-modelling.
    8. I’m sure there are some decent landlords. It’s just that I never ran into them and from what I hear most tenants don’t either. OTOH I’ve heard from some landlords about some seriously chavvy tenants. Shame that so much money changes hands and both parties seem to be pissed off with the deal
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