Shares beat housing, even in Blighty

You’re a lone voice in the wilderness if you favor shares over property in the UK. UKVI calls out  five family members who are of the ‘property is my pension’  school of thought with him being the odd one out. Me too – BTLers to the left of me, housing rampers to the right of me – a cynical Ermine feels stuck in the middle with Stealer’s Wheel

on the subject of property, specifically residential property. It’s an asset class I loathe, and yet everybody else in Britain is in love with it. There is, apparently, no more sure-fire route for an ordinary middle-class Brit to financial Nirvana than a nice li’l buy-to-let or two, preferably bought with the magic of other people’s money.

In the limiting case, we will have everybody over 45 ‘owning’ two houses renting one of them to people under 45. Britain’s factories and service industries can lie shuttered, and we will have a perpetual motion machine when all the old ‘uns can retire at 50 and throw parties where they moan about their children not being able to afford to buy a house. Presumably the proceeds of their BTL will be handed down to their children when they reach the allotted hour, hopefully when said children get to around 451, and so the circle turns again.

So I was pleased to see on Monevator’s 10’th anniversary post  a copy of this chart from This is Money

Where it appears that shares beat residential property by about 30%. With shares at very high valuations at the moment that is comforting – if we have an average sort of crash2 soon then that 30% differential could easily be given up at the low water mark, but UK house prices are also at all time highs. It is not entirely clear to me on what basis This is Money computed the TR data for housing – by rights they should include rents, less maintenance and less mortgage servicing costs, conveyancing, SDLT and agency fees for the average BTL hold period whatever that is.

Perhaps the BTL boosters were right, provided they could raise the capital to go all-in in June 1995. That’s a yes for Fergus Wilson but perhaps a no for pretty much everyone else, because of the lumpiness of property you need to time your entry into the market very, very carefully, and the slow cycles mean entry points are few and far between. If ever there was a call for an investment trust3, residential property would be an obvious asset class, presumably the reason there isn’t anything like this says something about the aggregate returns on offer.

UK real house prices – 1995 was a barnstorming year to start your property-owning journey. The downturn at the end has tipped up again – KPMG have a report from 2017 for those wanting more

Stock market cycles are shorter than housing cycles, and 1995, the datum reference, was an absolutely great time to buy UK property, as twits like me who had bought property in 1989 started to capitulate and actually pay down the excess rather than hoping that it would ever come good again in any useful period of time. KPMG tell us 2009 was the second time house prices crashed since the second world war, while there have been 15 stock market crashes and bear markets since the war, counting US and UK ones, the sort that would bother somebody holding VGLS100 in the UK if it had been available in Macmillan’s time.

Ever the contrarian, Merryn Somerset-Webb tells us that these days houses are cheap in terms of gold, and I didn’t do so badly compared to people who bought between 1997 and about 2003.

All I can say is that she didn’t live the decade when my mortgage was higher than the value of the house or pay the difference down from earnings… KPMG have a chart of mortgage interest versus income which highlights that I drew a particularly short straw in 1989

Mortgage interest as a proportion of wages

Although the recent highlighting of mortgage plus repayment shows servicing costs are at historic highs relative to the early 1990s. Presumably KPMG is of the opinion that previous generations paid down their mortgages with fairy dust rather than real money.

I am all for buying the house you live in – pretty much for the converse of the reasons Joe Public gives for landlordism. Renting is evil in the UK and residential tenants have very little security of tenure. This is what makes landlords rich. You want to free yourself from the ministrations of Britain’s army of amateur landlords, because what’s good for them is not good for you. After that’s done, residential property is a shockingly illiquid lumpy asset class compared to the average Brit’s net worth, with serious costs of carry and transaction costs, because a house is a physical object subject to entropy; it’s always trying to fall down. As an asset class it stinks on the convenience front because of its indivisibility and illiquidity.

Unlike gold, it is at least productive, inasmuch as it provides a service that tenants will pay for. It’s not tremendously scalable, you’ve got to save up a lot of rental profits before the deposit on the next place, unless you are a Fergus Wilson, who happened to start in the early 1990s of knockdown house prices.

Stocks you can buy bit by bit at average prices. Houses, not so much

There are other shockingly toxic issues to do with residential property. You can invest regularly into the stock market, it’s called pound cost averaging. I do this still now – I think the stock market is ridiculously overvalued, and I hate myself for buying into it regularly. But it is remotely possible that it will go up for a couple of years, in which case I will lose out by diddling on the sidelines even after the inevitable crash, although I am reducing my contributions and holding more cash than is probably good for me.

You just don’t get to do that with residential property, you go all in with borrowed money when you buy your first house, somewhere in your thirties is the place in the normal human lifecycle. Vendors will laugh you out the door if you ask to buy that house over the next ten years in instalments with it marked to market each time.

Since you can’t raise the money you buy with a mortgage. That works like gangbusters when the housing market is going up, but it’s total misery when it’s going down. Because housing cycles are slower the misery persists longer, too. So not only do you not get to ramp your way into this market in a measured way, you get to do it at a time not particularly of your choosing – the time you need to engage with it was determined by la petite mort nine months before you were born, although it only comes to fruition after three decades pass.

My experience matches the chart. For sure, I was whacked around the chops with a wet fish by the stock market in the dotcom boom and bust as I learned the ropes, particularly in what not to do.

what not to do – contract notes from my dotcom days. Do. Not. Churn.

But it served me far better since then, and most of the gains I have made were from a combination of saving hard and the stock market. The hit I took was all money I had earned and could afford to lose, whereas with the house I hadn’t earned the money that I lost and could only just afford the loss. If I scale the money I stupidly paid for that house in 1989 and adjust it for inflation then it is only 20% less than my share of my current house, perhaps 40% less if I allow for the amount of equity I released along the way, which went into the stock market. I’d have been better off with gold, although the utility of a house in defending myself against the depredations of BTL landlords has great value of its own.

So it’s good to feel vindicated, despite all the property clowns to the left of me, joker landlords to the right of me. Those results have integrated several stock market cycles including one near death experience in 2008, but perhaps two housing market cycles and no catastrophic events like the early 1990s housing price crash. Reversion to the mean, clowns and jokers… In your favour, the illiquidity of your assets mean you escape some pathologies of the stock market investor, as UKVI went on to say, but you don’t have to be a stock market muppet!

  1. the implication is that they have these kids no earlier than when they are about 35, else the kids will be too old by the time the parents cark it 
  2. The credit crunch was a non-average crash – from the UKX high of 6732 in Jun ’07 to a low of 3800 is a suckout of 44%, it took to July 2009 to recover to only a fall of a third. But then unlike you do with a house, you’re a bit dippy to save up in cash for years and make a single humongous share purchase, so your average purchase price is unlikely to capture only the peak 
  3. You get plenty of investment trusts in commercial property in the form of REITs but despite the generally believed sure-fire one-way money-tree nature of UK residential property I know of no residential property REIT. You get oddball companies like Grainger PLC, and Castle Trust bastardised their Housa index product into bonds, presumably because they couldn’t turn a profit on it. Such a product would greatly help first-time buyers by allowing their deposits to track house prices. The closest I could find to a res property REIT is Hearthstone, but another problem for buyers is they need to track prices in the region they want to buy, since nobody buys the average UK house in reality. IG Index used to have regional house price indices, but the problem with spread betting is that the cost of carry is high for periods longer than about six months. 

Trending now – automate your spending with subscription shopping

A few years ago1, a young-adult daughter of some friends posted on Facebook about one of the delights of her office routine that made the experience of work bearable – “Look at all these yummy treats in my Grazebox, oh my,” with obligatory pic of the contents. I remember thinking at the time that this was wrong on so many levels, starting with the fact that sedentary office workers don’t really need to ‘reimagine snacking’.

“Imagine having taste experts on hand to select snacks for you! With a graze subscription you’ll do exactly that, all you had to do is tell us what you like and we’ll tailor the flavours of each box to suit you.” It’s a packed lunch, FFS. Just say no to mindless shopping and consumption. If you want office snacks, go get em, but make the effort

You sign up with Graze, they mail you snack-sized boxes weekly at £4 a box, so you are paying £20 a week for your packs of mixed nuts. Tesco will sell you a 250g bag of mixed nuts for £1.50. Estimating your graze box is about 100g, you’re paying £17 a week for the privilege of not having to think about the office snacks aspects of your shopping 😉 That’s about £900 a year, a sizable chunk of a typical starter wage.

The Grauniad tells me that this is a special case of subscription shopping – a new up-and-coming trend

Welcome to the shopless shop, where customers pay for decisions to be taken out of their hands. Since 2014 the number of visitors to subscription shopping websites has grown by 800%. Customers receive a “curated box” of items of beauty products, clothes for work, even toys for their pets.

This sort of thing should really come with a whacking great link to MSE’s Demotivator tool, to help you compute just how many extra hours you are working to save yourself the effort of thinking about what you’re about to shovel into your piehole on a workday. It’s getting on for 4% of your take-home pay if you are on the average UK full-time wage of ~£27k. Let’s hear it from the Demotivator2

At least with the latte factor 3652days took us to task for being miserable gits you can’t forget it at home, with the graze box you still get to brown-bag your lunch.

We do not need more mindless consumption

I did my fair share of mindless consumption, the purchase of this that and the other that would make me better at something.

Continue reading “Trending now – automate your spending with subscription shopping”

BofE’s Ben Broadbent inserts hoof in gob, message gets tossed in can

Poor old Ben Broadbent, second in command to the suave Canadian fellow Mark Carney at the Bank of England. Mark’s a chap who can fall out of a boat without making waves, unlike his deputy.  In the hoopla about Ben’s  perhaps unwise choice of words – did you know climacteric1 was a thing? his message got lost. but it’s pretty straight between the eyes. In an article for the Torygraph in the guise of Edgar Allen Poe’s Raven, the harbinger of doom says

compared the current slowdown in growth and wages to a lull at the end of the 19th century, when the height of the steam era was over but the age of electricity was yet to begin.

Today’s economy could be experiencing a similar trough as it passes the boom of the digital era and awaits the next big breakthrough, possibly with artificial intelligence.

Ben Broadbent to British economy – you’re over the hill, every which way is down from here for at least a generation

Oy vey. And among other things it’s good to know that the ermine is doing his bit2 for this incoming doom:

something similar happened in the late Victorian era. Towards the end of the 19th century, British productivity “slowed pretty much to a halt” after peaking, as it entered what he labelled a “climacteric” period.

The word “climacteric” is, according to Mr Broadbent, a term that economists have borrowed from biology and means “you’ve passed your productive peak”. It has the same Latin roots as “climax” and means “menopausal but it applies to both genders”, he said.

Mr Broadbent added: “I once got an economist to explain the origins of the word ‘climacteric’. As soon as he started talking to all these middle-aged men – about [how] it means you’re past your peak and you’re no longer so potent – they all said: ‘We understand’.”

Hehe. I understand that climacteric bit, after all I am no longer a productive member of society. For those lucky enough to have the choice, it comes from the age-old arc of a human life, poetically summed up by Carl Jung thusly: Continue reading “BofE’s Ben Broadbent inserts hoof in gob, message gets tossed in can”

Retired accountant fails to understand interest only mortgage, loses house

It must have been so simple when he was a nipper. You buy a house with a mortgage, and you got to pay back a shedload of interest and a teensy bit of the capital. 25 long years later and this happens

how a traditional mortgage builds equity

as the dynamic balance between interest and capital repaid shifts in your favour. The downside, of course, is that you have to pay off the capital. You pay roughly twice as much1 for your house if you buy it with a mortgage than with cash, due to paying interest for 25 years. Which is why some bright spark dreamed up the interest-only mortage.

Although we now think of them as ways to enable the BTL brigade to shaft everyone younger than themselves, the IO mortgage was originally dreamed up to make houses more affordable by halving the mortgage payments. Easy peasy. What actually happened for a while was house prices went up2, because every time you make the existing price more affordable the price adjusts so it becomes only-just-about-affordable, because that’s where premium scarce goods reach equilibrium in a market economy. It’s only the punters that can’t afford the prices and fall out of the market that puts a brake on house prices, but UK governments have never acted on this because most voters want high house prices. Governments will change that when the increasing age people buy their first property means there are as many non homeowners as there are homeowners of voting age.

Enter stage left, an accountant, age 77, mithering about his IO mortgage being called in

who didn’t realise you had a pay off an interest-only mortgage in this lifetime, rather than the next. Len, this post is for you. There’s pathos in this story on so many levels, I mean, FFS, this dude worked as an accountant for a living. It’s fair enough for the interest-only mortgage to catch out young whippersnappers like Joe and Josephine in the hands of Mr big Bad Wolf, but grizzled greybeards of 77 who have only just wised up to the fact that they have aught to pay off the capital have no excuse. These guys had the temerity to complain to the Financial Ombudsman and then when they got the finger from the FOS because of the pickle they got themselves into through overspending in retirement, bleat to their local MP. The MP spins this as a tale of dreadful ageism by Santander. No, they’d just like to get their fricking money back before you die. I’ve done this story too many times before, WTF is it with the British and housing?

I know it’s impolite to mention the Grim reaper but it’s a fact that every 24 hours you live you get a day closer to death. I am nearly three decades closer to death than when I took out that mortgage, which is why I paid the bugger down, and that’s even without the benefit of a life of accounting to see the problem rushing up to meet me. The MP puts this spin on it

Lloyd called on Santander to either increase its age limit for mortgage borrowers or abolish it, and said: “Without such a move, Mr and Mrs  Fitzgerald will lose their home. Is that really what the bank wants to see happen? I will also be raising this vital issue in parliament. I am sure there are tens of thousands of other families potentially facing the same, desperate situation in the coming years, which is unacceptable.”

No. It’s a situation that has been developing over decades, and they can’t say they weren’t warned. The Fitzgeralds chose to stick their heads firmly in the sand, and that’s why they are in the shit. It also shows the folly of another innovation in mortgage finance, the short-term fix. These guys remortgaged in 2007 for 8 years. It’s fair enough, when the 8 years are up, you need to ask again if you can stay in that house if you don’t have the money to redeem it.

You have the option to borrow from someone else I guess, but nearing 80 you just aren’t a good prospect, because you have zero human capital left. If you financial capital isn’t enough to keep you in your house, then you don’t get to stay in that house, and you can’t earn any more financial capital. You are stuffed. The moral of the story is pay your bloody mortgage off in your early retirement, or be prepared to move or rent.

This is not a sob story of somebody who was taken out by events beyond their control. This was wilful overspending on a big scale for decades. I could have had many fine holidays with the money I used to pay down my mortgage. The fact this guy plied his trade as an accountant takes the biscuit. Continue reading “Retired accountant fails to understand interest only mortgage, loses house”

getting under the skin of Brexit

A lot of political discourse these days consists to yelling insults to the other side across an unoccupied no man’s land of the vacated centre. The Ermine is/was a Remainer, largely from the economic point of view, but I thought I would use Kindle Unlimited (KU) to try to get a understanding of what the other side thinks. I’ve already used Brexit Central, but the advantage of KU is that political screeds often end up on Kindle Unlimited, so you can sample a lot fast. 1 I wanted to try and get inside the heads of the majority, to let people develop their arguments, rather than take the soundbites. Plus people are more civilised when they think they are talking to the converted.

There’s a lot of dross on KU, some of the Brexit stuff confirmed the Guardian’s stereotype of the Brexiter as old racist white guys who hated immigrants. I wish I could remember the authors or the books in question, they yattered on about “common sense” but were basically latter day Enoch Powells without his rhetorical gift, and disliked all immigrants including white Eastern European ones. This kind of author made themselves known from the first paragraph.

I wasn’t after that, I was trying to get a handle on the case for Brexit. Two KU authors helped me get an idea, one was Daniel Hannan’s Why Vote Leave, with an honourable mention for supporting cast to his jingoistic book How we invented Freedom.  The other was Andrew Mather, who falls definitely into the category of old white guy 😉 One should always be wary of people who cite their membership of MENSA2 in an indirect appeal to authority but one should equally be wary of inferring the general from the particular, people who are wrong in some aspects aren’t therefore wrong in all. Mather’s book was

Brexit: Why We Won: What Remain will never understand about the Leave victory

which seemed to be a good place to start as a Remainer trying to understand the leave result. These aren’t the only decent books from Brexiters, but these were the ones I read rather than skimmed. I came away from the exercise with more respect for the internal consistency of the leave argument for its supporters.

The price I paid for this project is that Amazon now thinks I am  on a diet of the Daily Express, Breitbart, and this is the sort of reading they offer up, I guess one has to suffer for one’s art 😉

Last time there was a bit about trigger warnings, global warming conspiracies and social justice warriors, so I seem to getting less intolerant with distance from this exercise. I didn’t realise that Brexiteers swam in such waters 😉

Amazon is of the view that there is some correlation between Brexiteers and climate change denial, and oddly enough those that rail against speed cameras repressing their inner Mr Toad. It’s a funny old world, and it shows the toxicity of the way filters amplify extremes. In the analogue world you would walk past the billboards for the Tories, then the one for Labour, whereas on the Internet there’s some guy running ahead fo you swapping out the opposition’s ads for ads for cars, lingerie and PPI claims before your sensitive head gets troubled with uncongenial points of view.

Some of the problem of Remain’s argument was that it was bloodless and talked in terms of abstractions,  ‘the British economy’. I quite like this description of how dialectic tends to swing between the poles of abstraction and reflection, which puts the issues more poetically than I could.

The [British] economy is an abstraction, and for the last thirty years or so it has gone along with the assumption that neoliberal assumptions of free trade, globalisation and lower taxation are all good, and indeed ‘the economy’ has expanded greatly as a result. The Britain I graduated into, less than a decade after the last EEC referendum, was far poorer in general than the Britain of 2016, but not everyone was poorer than now in every way. As JMG described, the issue with abstraction is

it becomes impossible to miss the fact that the supposed universality of the world-theories of abstraction has been obtained by excluding countless things that don’t fit. Some of those excluded things are bits of data that contradict the grand theories, but some are much vaster: whole realms of human experience are dismissed as irrelevant because they don’t fit the theoretical model or the methods of inquiry that a given age of abstraction happens to prefer.

Let me take one example of human experience – youth unemployment. I graduated into Mrs Thatcher’s first recession, and found my first job a month after unemployment reached its high-water mark, worse for that age group than at any time since. I was unemployed for six months. The experience left enough of a mark that I never took that chance again,  finishing work from one company on Friday and starting at the next on Monday, until I went to work for the very last time 30 years later. Continue reading “getting under the skin of Brexit”

Escaping the avaricious paws of Interactive Investor – again

I opened my S&S ISA in March 2009, with Interactive Investor (III). I was used to their system, had used it for shares research in my dotcom boom and bust days, and their charges were OK. What I want in a ISA platform is pretty simple. No ongoing fees, and specifically no percentage fees. I am happy to pay for buying and selling shares, not to hold them.

Before the Retail Distribution Review (RDR) this was common. Platforms made their money on kickbacks from funds. I had been educated to this problem so I didn’t have any funds. Simples. The RDR was supposed to help the common people, but I took the shaft. I was perfectly happy to have my platform costs subsidised by all those fund holders. III introduced a £80 p.a. fee, apparently for our own good. From their guff at the time

We believe that customers should be engaged with their investments and actively manage their portfolios. To support this, we are introducing a quarterly fee of £20. If you already trade twice or more a quarter then this fee will make no difference to what you pay – it is effectively an advance payment of those first two trades for the quarter. If you are trading less than that then you will still have the right to your two trades in each quarter without any additional payment and hopefully feel encouraged to more actively manage your investments.

I’d go to IG Index if I wanted to trade, guys. That’s not me, so I jumped to TD Direct. Not without pain, indeed iii’s attempt to make money out of their 2012 switchers showed that they are moneygrabbing scum, which is something I had forgotten over the intervening five years.

Moving a S&S ISA is tedious and slow

It took ages to move that ISA, I moved it in stock format. Don’t know why we suddenly resurrect Latin and call this in specie, but that’s the convention. You have to watch it because some platforms charge a transfer out per line of stock. OTOH you get to pay the transaction charges twice if you convert to cash and rebuy. Some people say there’s the extra hazard of being out of the market, and I suppose since bull markets are longer than bear markets that’s probably the case for a randomly chosen time period.

I had five years with TD, where they generally did what I wanted them to do, and didn’t give me any trouble, other than starting to charge for holding funds. So I got rid of funds I’d acquired with TD and switched to using ETFs. That gets easier as the ISA becomes a bigger beast. I don’t really buy less than £2k of anything now, £12.50 out of that is 0.63%, on a par with stamp duty. So I take a 1% hit upfront. On the £500 transactions when I started out in 20091 that 12.50 was an ugly 2.5%, which is why everybody used funds in those days. Paying the 3% in kickbacks and fees, no doubt 😉

Having laid the beast of III to rest, the zombie comes after TD Direct and buys it up. Other TD Direct customers were more savvy than me and jumped early, I left it until III tell me they are bringing their ugly “annual fees but not if you trade lots” fee structure to TD Direct, and get caught in the crush for the exit. I initiated a transfer to iWeb end of October 2017. Every month after I chased them in their private message system and nothing happened. Continue reading “Escaping the avaricious paws of Interactive Investor – again”

Millennials can chill about not having massive savings

… because they’re young. Young people generally don’t have savings, and it beats me where the idea came from that they should have. H/T to Monevator, who introduced me to the idea that people in FT land are feeling troubled that only one in six millennials have £100,000 in savings. My personal reaction to that was WTF, what do these guys know that I didn’t?

I was in my late 40s before I ever saw an account with six figures to my name. Apparently you need a deposit of £100k to buy a house in London. Housing has always been expensive in London. I was born in London, went to university there, and spend the first decade of my working life there. I had job-switched a few times and the Bank of England inflation calculator tells me I was earning reasonably well for a twenty-something. I was single and child-free.

What was the best housing situation I could afford back then? A single rented room in a HMO in Ealing where I had to put salt round the periphery to prevent black slugs invading the place. This was an upgrade on the various rooms in shared houses I’d lived in before. I was in my late 20s, and no, I didn’t really have any savings either, other than about £5k, because I had believed that I needed to pay the fees of my MSc course myself, but it turned out that the Manpower Services Commission gave me a grant. It still didn’t help me buy a house in London.

So I moved out of London. The problem of not having a deposit was still there, but when I moved to Ipswich I was earning better and the prospects for salary increases were better for me. So I borrowed about £10k from a MBNA credit card on interest-free credit for a year to put down as a deposit for a house, perpetrating the single greatest piece of financial folly in my entire life – buying a house at a market high. I used my better salary to pay down that interest-free card over the year – I really did pay 0% on it. But I didn’t have savings of £15k from the start. Those were more innocent times, when mortgage companies looked at only your salary and didn’t ask about CC debts, because such debt was not as commonplace as now.

That £15k deposit was the equivalent of £40k now. Earlier generations of Ermine weren’t any better at saving than Millennials. There is an argument that young people start off more skint now than they used to. There is a compensation for those working in cities that they observe much faster career progression in their early 30s than previous generations

so it’s difficult to tease this appart – I would say that average and middling talented young folk had an easier time in my generation that Millennials, but high-flyers have much better opportunities now, part of a general winner-takes-all trend.

The Hemingway law of motion – Slowly at first, then all of a sudden

In Hemingway’s The Sun Also Rises, there is this passage summarising  economic change

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

Continue reading “Millennials can chill about not having massive savings”