5 Oct 2017, 5:30pm
housing personal finance
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  • Cheques checked the recipient’s name – BACS & CHAPS use untested numbers

    It’s a funny old world. Way back in 1979 when I got my first bank account I got issued with a thing called a cheque book. You could write out the recipient and how much you wanted to pay them and that was all you needed to do. In those days the cheques were open, so some thieving git could swipe it or steam open the letters, and pay the cheque to themselves or ask for it to be paid in cash over the counter. Fewer people had bank accounts then – when I started my first job I was paid by open cheque that I had to go to the bank over the road and exchange for cash.

    To forestall the hazard of dodgy geezers steaming the mail open they changed the system so you got to draw a couple of lines across the cheque and write A/C Payee, and they changed the law such that this happened

    Not if it is crossed ‘A/C Payee Only’ or ‘A/C Payee’. The Cheques Act 1992 and Section 81 of the Bills of Exchange Act 1882 give statutory power to the ‘A/C Payee’ and ‘A/C Payee Only’ crossing, when it is used. The legislation means that a cheque which bears the ‘A/C Payee’ or ‘A/C Payee Only’ crossing can only be paid into an account in the name of the receiver of the cheque exactly as it appears on the cheque.

    A cheque crossed A/C payee. Presumably the computer’s trained to ignore the * sign.

    Now in practice you could usually get away with paying in cheques in a different name if they were small, or if it was just the first name that was different. I presume if the payer kicked up a fuss then the bank would have clawed the money back, and if recipient had skipped to Rio then they’d have to refund the money. All in all a perfectly serviceable system, though because of all this possibility of fouling up you could only count on having the money after about five working days of paying the cheque in. When I bought my last house in the dog years of the 1990s, I had to make up the mahoosive amount of money I had lost on the previous one and pay even more because I was going upmarket from the two-up-two-down bachelor pad I had foolishly bought in 1989. To do that I went to my solicitor and paid them a cheque. There was never any issue of the secretary deciding she wanted a knees-up in Lanzarote with all her pals funded by running off with the cheque because she’d have had to change her name by deed poll to the solicitors and open a bank account in that name.

    Fast-forward 20 years and we don’t check the name any more

    Twenty years of technical progress passes, and I get to receive the proceeds of my old house. It all comes down to a six-digit number and an eight digit number. Sure, the payment system would like a name to put in the payee field, but it doesn’t matter if you put Mustela erminea, Beyonce or Beelzebub in there. The routeing system doesn’t give a damn. So criminals hack emails and change the details, because the humans look at the name and think it’s all okay but the transfer goes to a different account, which is then emptied and the bad guys scarper with the money. And you get to read newspaper articles like this, this and this

    Given all the usual delays involved in selling a house, there’s something to be said for the security of the good old crossed cheque. We were smart enough in the 1980s to realise that making the name matter was key to fixing this, but that wisdom has got lost in the search for expediency. Is it really too much to ask that 21st century money transfers meet the standards of the 20th century paper methods?

    This pathology also applies to the faster payments system – it doesn’t matter if you make the payment to your cat rather than the payee, it’s all about the six digit sort code and the eight digit account number. They could make these combinations testable by the same system used to catch mistyping of credit card numbers, but this isn’t done either. Update – this Ermine rant is not in fact correct – see David’s comment below. Despite this, some people still seem to be able to screw up in this way – presumably they err is more than one number.

    So you can easily mistype or transpose the numbers, sending your payment to the water company to Bill in Basildon, and you don’t get to know that until you start getting dunning letters from the water board. Bill doesn’t have to give you the money back – after all he’s done nothing wrong. He never claimed to be the water board, all he saw was a kind gift from an unknown benefactor come out of the blue, and he’s probably spent it now. As Faster Payments say on their website, it’s tough luck

    Faster Payments, once sent, cannot be cancelled.

    Whilst the vast majority of payments are made without issue, in rare cases problems can arise if the wrong information (e.g. sort code and account number), is entered – resulting in a payment being made to the wrong account.
    It’s vital to double check the sort code and account number before sending a payment: payments are processed only using these numbers and getting them wrong is like sending a letter with the wrong address and post code.

    The last statement is bullshit – if you send a letter using the wrong address and postcode there’s a much better chance of it getting to the right place because there’s some redundancy and there’s also local knowledge with the postman. And the name would help clarify matters, as it did with crossed cheques.

    Double checking doesn’t help with some conceptual errors, like transposing some digit pairs, for the same reason that it’s tough to proof-read your own writing. To err is human – we could do with helping people out a bit. This is why credit card numbers use the Luhn algorithm, to catch simple cock-ups like transposition and single digit errors.

    The six payment systems in the UK. More info from the BACS PDF

    How about BACS – this is the payments system 1 you use when you put money in, or take it out of NS&I. My solicitor was proposing to use that for the house money because it would save me the £30 transfer fee. I decided I was easy with paying £30 to know I’d got it on Friday afternoon rather than some unspecified time probably Wednesday the next week. If something goes wrong, time is absolutely of the essence to flag up that the crims have made off with the loot to at least try and freeze the receiving account before they empty it over the weekend 2.

    I was unable to determine if BACS checks the name, though the warnings from NS&I to get the right sort code and account number imply not. BACS gives you an automatic delay of three working days, as I found to my cost when I transferred money into NS&I using a debit card, and then got to ring them up to find out what black hole half a house worth of money had disappeared to. At least that made the three working delay between transferring out and receiving it a bit more understandable, though it still raised the blood pressure.

    We have implemented a system without number error checksums, casually tossed away the A/C payee name checking of the cheque era, and sped up the ability of the criminals to scarper with the money by an order of magnitude. This is not progress.

    Notes:

    1. BACS has a rather neat PDF describing the six inland money transfer systems in use in the UK
    2. This is why in an ideal world you should complete on any day other than Friday, particularly a Friday before a bank holiday weekend. Of course, everybody wants to move on Friday so they don’t have to take time off work, which suits the bad guys just fine
    30 Sep 2017, 1:46am
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  • Michaelmas – a good time to get out of Britain’s favourite asset class

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

    but when I look at UK housing I see this

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

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

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

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

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

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

    On the way to the Postmodern

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

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

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

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

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

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

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

    Buying a house is a lot more scary without a mortgage

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

    You can borrow from your ISA under certain conditions

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

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

    18 Apr 2017, 11:24am
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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
    housing personal finance:
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  • Residential property investment success with Castle Trust

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

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

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

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

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

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

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

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

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

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

    Spread Betting

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

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

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

    Low interest rates are no kindness to new house buyers

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

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

    UK housing is a harsh mistress in a downturn

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

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

    Notes:

    1. Castle Trust do lend to landlords too, so I could have been shafting the young by proxy
    2. I appreciate the poignance of that now, but heck, I was a Bremainer, so it wasn’t me that hurt this option for twentysomethings
    3. I paid 6.5% for most of my time and 15% just after buying the house (from a start of 7.5% in 1989)
    19 May 2016, 5:35pm
    housing
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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
    housing personal finance
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    16 comments

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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
    housing rant:
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    32 comments

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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
    housing
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    69 comments

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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
    housing personal finance
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    10 comments

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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
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