It’s the last day of February 2014- a notable date for me, because twenty-five years ago I read this date on a form I signed to take out a 25-year mortgage as I perpetrated the biggest personal finance error in my entire life. Of course my twenty-something self didn’t know that. It dwarfs any stock market losses I took in the dotcom bust, and it hit me earlier in my working life. I bought a house – a two-up-two down, at a four and a bit income multiple, with a 20% deposit, half of which was an interest-free loan from a credit card[ref]MBNA got all their money back, on time, and didn’t charge me a bean[/ref].
Ten years later I ate nearly a 50% loss on that house. Some of it was poor house maintenance, but most of it was buying at the wrong time, in the Lawson boom of 1989. And that 50% loss is slightly offset by the rent I would have otherwise paid. So when Millennials hear that the older generation had it easy on housing etc etc – well, not all of us did. It’s a cautionary tale
The UK housing market can be irrational for longer than you can stay solvent
three years after I bought, paying a standard variable interest rate of 6.5%, I was paying a mortgage interest rate of 14%. I froze in that place in winter because I didn’t dare run the inefficient gas fires longer than I had to, and made friends with Sainsbury’s packets of mixed beans for cheap eating. However, I didn’t stop going out with pals drinking beers, so maybe hold on the violins 😉
Colleagues at The Firm did highlight the macro picture, that Lawson was going to axe MIRAS for couples and that this was pushing up demand. But I was already running from high house prices in London, leaving the city of my birth and where I had grown up and started work. The crux point was when I was in the Broadcasting House bar, slowly drinking Fuller’s E.S.B. until the pain went away from all the people taking about how much their houses had gone up in value and all the yuppie consumer shit they were going to buy with the proceeds. All I had to look forward to was to get on the tube back to Television Centre, and then get on my bike and cycle up the A40 Westway to Park Royal, to go back to my bedsit with the salt round the outside so the black slugs didn’t invade and to shovel 50p pieces into the meter to heat up something in the Baby Belling pie heater. And I thought to myself there has to be a better way, and that was the day I realised that I was too poor to live in London. So I left.
In running from that experience I ran into trouble here. I was lucky, that I kept my job, I have never defaulted on the mortgage. The 25 years I had signed to looked like an endless amount of time – I had only been on this earth for a few years more, and economically active for a fraction of the time. The way we do housing is really horrible in the UK – the expectation that people have of buying a house in their 20s – when life is changing, careers and life stories are changing – it’s nasty, but the ramping upwards of house prices to earnings pushes people to get a foot on the ladder when they are not yet experienced enough to understand a financial market or have experienced that markets have cycles. I started at a peak, because of my inexperience, I extrapolated the upswing that was all I had known into the future.
There are three messages from this cautionary tale. One is that the cycle time of the housing market is shorter than a typical mortgage period, so as long as you don’t suffer a calamity that makes you a forced seller without rebuying[ref]if you sell into negative equity you will usually not be able to buy again because of an excessive loan to value of > 100%[/ref] it comes out in the wash.I sold in the late 1990s, but immediately bought the same sort of asset with the proceeds and a bit more. I benefited from the upswing since, that compensated for my losses, so integrated over 25 years I am probably a slight beneficiary of the housing market.
For what it’s worth, shares have done me much better. My shareholding net-worth – even evaluated at the low-water mark of the 2009 of half the value now is more than my housing net-worth. That’s because though I suffered losses at the beginning, they weren’t leveraged losses like a mortgage is, so I could start again with the learning and get ahead. Whereas housing losses set you into negative equity – you soullessly pour half your salary into a money pit and have nothing to show for it. And you can’t move until you have backfilled that hole.
The second is that rent is not wasted money – not if the alternative is negative equity. Now that is wasted money – you pay into a black hole that stops you moving.
Lastly, there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of that first house. All starting from a 5 times single salary house price multiple and a market crash. It looked as horrible to me then as it does to many people now, though I do acknowledge that middling jobs were better then than now.
It doesn’t necessarily turn out as bad as it looked at the start. But try not to buy a house at high valuations. I have no idea if houses are valued high at the moment – if there is an economic boom in Britain as we crawl from the twisted wreckage of the financial crisis then perhaps they are at fair value.
On the side of the young is that the Baby Boomers will start to become decrepit and die off in the coming couple of decades; this should release some family homes back onto the market. Against that there is increasing polarisation and jobs flow to London.
I think the London market is a lost cause for the young and impoverished – in the end London will probably have to become an independent city state. As a mark of what’s gone on there even now I would have to commit nearly all my capital resources other than pension to buy my mother’s house in London – the aggregate value of my career doesn’t match the capital value of what my dad managed to buy forty years ago on a single blue-collar salary. But that’s London for you. It’s a different country.
I don’t know why Britons love the housing market so much and yet are so fearful of the stock market. In my experience the bite of the housing market is far worse, and it’s responsible for far more human misery than the stock market. The housing market hurts poor Britons in its rapacious rents and dead hands on the lifetime earnings of people even if they own, whereas the stock market tends to hurt mainly the well-off. And yet housing is much-loved, whereas the stock market is considered a fickle mistress. There’s n’owt as queer as folk, as they say up north.
Would the young Ermine have recognised his future self, playing the role of the Ancient Mariner and the young Ermine as the Wedding-Guest? Probably not…