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.


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[ref]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[/ref], 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 [ref]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[/ref]. We have the economic damage[ref]or short-term adjustment to liberation pains if you are a Brexit booster[/ref]  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[ref]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[/ref] 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[ref]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[/ref] on the  terraced places were about £45k, and semis were about £60k[ref]this was in 1989, the 2016 inflation adjusted amounts are £102740 and £137000 respectively[/ref]. 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[ref]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[/ref] 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[ref]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[/ref], 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[ref]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[/ref] 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[ref]which is the amount non-earners can put in a pension[/ref] 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[ref]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.[/ref] 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,[ref]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[/ref] 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.


Middle Class Finances – Death by A Thousand Cuts

Another one in the complainypants section, but this one’s a more subtle object lesson in how not to lead a middle-class life. Perhaps the Ermine’s heart is softening as he gets older, or there’s a little bit of the there but for the grace of God since I screwed up with the toxic UK housing market too, though I don’t have 4 children 😉

Let’s hear it for the Daily Mail’s Shona Sibary, who sold her house and considers herself now in the rent trap.

Shona and family, before they got into the rent trap

Now I was able to see her fundamental problem, just from looking at the picture. In Britain today, a middle class family with both parents working will find it hard to raise four children. We normally associate big families with the undeserving poor because of the headlines, but thankfully they are not the only section of society that has large families, otherwise we would long ago have succumbed to the premise of the movie Idiocracy. The unsung other sector of society that often has larger than normal families seem to be those with a bob or two. Like David and Samantha Cameron, who ain’t short of a bean, or even IDS and Nick Clegg. Other wealthy families include Victoria & David Beckham (4) and Boris Johnson (4)

I first noticed this with older colleagues at work. The Firm was a prestigious operation in the 1970s and 1980s, and pay was probably upper middle class (in the eighth or ninth decile of the IFS income scales). There is a surprising prevalence of three-child families there, which I had found particularly surprising when I joined nearly a quarter of a century ago.

It’s not surprising that nowadays it is the poor and the wealthy that can go beyond the one and two-child norm. The former get us all to pay for it, and the latter are presumably rich enough to pay for it themselves. Anyway, ’nuff about families. How did Shona screw up?

Shona’s financial red cards

By failing to watch her back. Shona had a couple of big red cards,  I suspect that family was living way beyond its means for a long time.

Red flag #1 – they were remortgaging, not building equity in their home.

Look at how an old-skool repayment mortgage builds up equity in the house, by repaying some of the capital.

how a traditional mortgage builds equity

I pinched this from the excellent Mortgages Exposed website, which unfortunately uses infernal frames so I can’t link to the source itself, it’s under Capital Repayment in part 1. Now there are other ways of doing it. My original endowment mortgage was interest only, so in parallel with the mortgage there was an investment that should have been slowly rising to match the original loan. Either way, you should be building up equity, even if it takes the form of a separate asset.

Now the modern way to look at a mortgage is to take out an interest only loan, sit on your butt and whistle a dancing tune while the value of your house goes up. Voila, free money, you get equity without having to lift a finger. The catch is, of course, that the value of the house has to go up 🙂

Shona asserts that

After two decades of slogging to buy a house, maintain it and give our children security for the future

No, you did nothing of the sort. You’ve had that mortgage for seven years. If you look at the graph above, you should have a quarter of the equity in the house, assuming house prices hadn’t gone up at all from the start.
If you look at the equivalent graph for my mortgage career
an ermine's inflation-adjusted income and mortgage stupidity

You see that by 1996 I had at least reduced the total, by about a fifth in real terms (this graph is inflation adjusted to a nominal salary of 10k in 1984). That underestimates my repayment as it doesn’t show the value of my endowment.

So what did you do Shona? You remortgaged. Taking that equity out, and spending it. Doing that once is a bad sign – nothing wrong with remortgaging per se, but spending the proceeds is bad. Doing it another two times is more than careless, it’s positively greedy.It’s a big red sign in your finances that says “Wrong Way, Do Not Enter, Turn Back NOW”.

Your house is a place to live, it is not an ATM. Over the 25 year span of a mortgage, you will probably see at least two housing booms and busts. I bought in a boom, ate a 10-year bust, and discharged my mortgage in the next boom, that has now turned to a bust (my mortgage would have finished in February 2014 had I not discharged it early)

It is the foreknowledge of that next bust that should make you say “I will not take the money I gain from remortgaging and use it for anything other than buying an investment which will go towards buying this house”. For most people that investment is reducing the total amount of the next mortgage, which is tantamount to saying “never withdraw equity from your house, unless you are trading down”. There are some people who can do better than that. They are few and far between. Otherwise that bust is just round the corner, waiting to bite you.

Red Flag # 2 – your house is not your biggest cost!

This is awesome. If you really are middle class, and buying your house, then that house is nearly always your biggest cost. If it isn’t, you are either not middle class, you are rich/wealthy. Or you are in deep, deep, trouble. Nowadays it’s pretty marginal for the ‘middle class’ to be able to afford the typical ‘middle class’ three or four bed detached family home in the ‘burbs. If your house isn’t your biggest cost and you’re not rich, you’re skint.

Let’s take a look at what Shona spent the money on.

In our defence, we weren’t spending the money on expensive designer clothes, luxurious holidays or flash cars.

So glad to hear it. So what exactly was it that you overspent on then?

Much of it was going on school fees and upkeep of the house.

If you’re withdrawing equity from your house to keep the damn thing standing then you have got too much house for your income. However, that’s not really your problem. It’s the school fees. According to the ISC the average termly fee at a day school is £3655, about 11 grand p.a. A cursory look at your family photo puts three of those kids in school, ie £33k p.a. Assuming for sibling rivalry you aim to do that for all of them, you are looking at paying 4 * 11000 * (18-11) = £308,000 if you just pay school fees for secondary school 11 to 18 and £572,000 if you pay from 5 to 18.

That’s more than your house was worth at the peak. The house is not your biggest problem. It’s a combination of having too many children and looking down on the sort of education that dragged up scumbags like me. So for all the mawkish whingeing about losing your home, Shona, you have failed to clock the real problem with your finances. ‘Tis the fruit of your loins and the style in which you’d like to keep them. With their own rooms, if you please, nothing else will do for Shona’s little ones 😉 Since humans come in two genders and it is apparently not acceptable for brothers and sisters to share a room these days you actually only need three bedrooms if the family is boracic lint, fixed that for ya.

Get real, Shona. You were on a middle class income but living a life not commensurate with your means. It’s hard enough for the middle class these days to buy one house in 25 years. To aim to do that and spend even more than that on the nice things in life on that middle class income is taking the piss. It cannae be done, and you’ve just found that out the hard way. To my eyes you’ve cut the wrong thing, but I respect it’s your call.

Shona shows me I need a financial Distant Early Warning Line

I learned something from Shona. Her family fell foul of slow changes that gradually overwhelmed them. Many things get imperceptibly worse day by day, as global imbalances right themselves but they’re resisted by the structures we have already built. The creeping rise of Digital Taylorism making the professional and technical job a stressful and unrewarding experience is an insidious change, little by little. I didn’t realise that until it became too much and my defences were overwelmed, hence the crash course over the last three years in becoming finacially independent as a counterattack.

In the 1950s the US instigated a distant early warning line to scan the northern skies at the 69th parallel north of the Arctic Circle. It was standing sentinel for the signs of incoming Russian nuclear bombers, and was located in the harsh North to give enough early warning to mount a counter-attack.

I need something analogous to stand watch for slow insidious creeping costs and sound the early warning. I plan to instigate an annual review of financial commitments as a percentage of resources. If I see a non-negotiable cost starting to rise proportionally I will consider that the alarm is sounding and it is time to attend to it. It is always easier to launch a counter-attack before it is upon you overwhelming your defences, and this annual review of commitments will be my distant early warning line against stealthy creeping costs.

Shona’s family could have used something like that. Okay, the alarm would probably have sounded as soon as it was set up, but certainly on the second child’s school fees. It would have been an easier call to make at that stage – do we want a big house, or do we believe in the value of public school education* makes it worth getting the girls to share a room?

While I am working I’ve generally lived sufficiently below my means that I didn’t need that sort of thing. Though I aim to have over 50% income in hand once I stop working, I’ve still got several decades, decades in which I believe living standards in the West will decline in a big way. Though I may be resistant to wages being eroded, I won’t be immune from inflation and its evil twin, rising prices and taxation. A financial DEWline will help me marshal resources ahead of time, and shift them to minimise taxation. Particularly with significant holdings in shares, it’s good to have as much advance warning if changes are needed, to average out the horrendous temporal volatility.

*NB for non UK readers, bizarrely schools that you pay fees for, those that Americans rationally call private schools are called ‘public schools’ in the UK, because we’re strange like that.

The Road Less Travelled – A Better Way to Buy A House

I read M Scott Peck’s The Road Less Travelled a few years ago. Like any powerful message, it can easily be distorted if received by someone not ready for the signal. If you are of a Calvinist worldview that work is good for you then you may find confirmation of your world-view in the “life is difficult” opener of the first chapter, Discipline. You’re only looking at part of the story there, but you have to get further into the book to find that out 😉

In particular, he speaks for the virtues of grit and determination to achieve anything, to wit

  • delaying gratification – valuing future gains sometimes at the cost of present comfort
  • Accepting responsibility for one’s own decisions

I was reminded of this book when I read Monevator’s guest post from Tejvan Pettinger titled “Reasons to buy a house instead of renting“. Now in my view, at the moment there aren’t any reasons to buy a house instead of renting, it’s one of those things I learned by doing it in 1989 at a similar time on the cusp of a recession.

Mark Twain said

A man who carries a cat by the tail learns something he can learn in no other way

So it is with buying a house at a time like this…

Way back in 1988 I was in the Broadcasting House BBC bar at lunchtime, sinking a few beers as one did at the time of the liquid lunch to send off a departing colleague. I was a lonely grunt engineer, surrounded by beautiful people, all talking about one damn thing, which was how much their blasted houses had increased in value, or their friends had made on the sale of theirs.

I slowly drank myself to a stupor, trying to forget that at the end of the day I was going to get on my bike and cycle along the Western Avenue to Ealing, where I had a crummy bedsit with a electricity meter that took 50p pieces and I needed to get some salt to put round the perimeter to keep the shiny black slugs from invading the room.

What is it with rented accommodation and black slugs?  I encountered similar blighters in someone’s rented room on the first floor in Ipswich. Do landlords install them to stop their tenants getting too comfy I wonder?

Anyway, I managed to avoid standing up in the bar and hollering “STFU you smug lot, I am on an okay wedge working for this firm and I have no hope of buying a house in this damned city of my birth because of sleazeballs like you making a mint out of my misery”.

The modern equivalent of that is to get on pricedout and housepricecrash and blame the baby boomers for it all. Plus ça change, plus c’est la même chose. I felt just the same pain, but I couldn’t yell it out to loads of people on the internet. And I’d have queered my pitch with the girls, though I probably didn’t improve my case on that front by sinking five pints of E.S.B. so that at least if the situation didn’t look any better it felt less bad.

There’s actually a positive takeaway for this for the priced-out generation. Every young generation is “priced out” in their twenties, because the greybeards have all the money. How did the greybeards get it? The same way as I did – working for three decades! Despite manful attempts to spend it on holidays, booze and toys some of it stuck around 😉

When I got home I resolved to tackle the situation. I could either try to find work with Goldman Sachs to get the pad I wanted (I fancied a cool flat somewhere in Bloomsbury, please) or I could get the hell out of London and find somewhere I could afford on the sort of job I could get with my skills. I had spent all my energy railing against the unfairness of it all, and only when I had independently discovered what M Scott Peck had to say about taking responsibility could I find resolution to the problem. The next year I was in a different job, in a different part of the country, and stupidly putting down money on a house at the peak of the Lawson boom. Less than 20 years later, I had paid off the mortgage on the house I bought after that, despite nursing a shocking loss on the first house.

A Different Way to Buy a House

What I found so delightful about “Reasons to buy a house instead of renting” was that Monevator himself pole-axed the argument, with a single sentence in the comments outlining a different way to buy a house – the road not travelled.

I followed the traditional path, buy a house in my late twenties, spend the next 20 years paying for it. I was lucky to stay in the same job and location for 20 years, that sort of job is becoming less common now.  There’s another way.

What you are doing in taking out a mortgage is gradually buying a capital asset, that eventually by the time you retire should be paying your living costs for you. I don’t pay rent, and I don’t pay a mortgage any more. There are some parasitic housing-related costs associated with wear and tear that I do have to eat, but they pale into insignificance compared to rent or a mortgage.

The trouble with a house is that it is an illiquid asset, if you have to move for a new job you have to hope you can sell your house, or get stuck with the headache of being an amateur landlord.

What about the idea of pumping up your ISA and using the income from that to pay your rent? You get two things there, one is you build up a capital asset that roughly goes in line with house prices (house prices are usually high in booms and take a hit in recessions). You could use that to buy a house. The second is that once you have a capital asset enough to buy the typical house you would be able to afford on your salary, the income from those shareholdings probably makes a decent attempt at paying your rent.

I was in my late forties when I paid the last instalment on my mortgage. Monevator, by contrast, is out there in front 10 years ahead of me

As it is I’m in my late 30s with a portfolio big enough to buy a flat in London outright

Jammy b***d, good for him! Now there are significant differences – he is more entrepreneurial that I am, and I would imagine on what works out to be a better income – that is one of the advantages of working for yourself whereas I took the conservative and at the time safe approach of having an employer hedge all the business risks for me. Look at that difference in timescale. I did pretty well, discharging a 25 year mortgage in 20 years including one house upgrade, whereas Monevator has set himself up to be able to buy if he wished a decade earlier in his life, and in London, where he’s competing wit hthe financial whizz-kids and foreign shipping magnates inflating house prices.

There is much to be said for the investment asset approach rather than the bricks and mortar approach. With the latter, you are exposed for the full duration of the mortgage to losing your job and possibly having to sell up into negative equity or losing the house. Obviously with investments you can screw up royally or suffer a Great Depression, but provided you play safe and keep your wits about you then you won’t suffer a forced sale where your assets are marked to market.

Once you have the money to buy a house, and once you are old enough to retire/no longer need a job to survive financially, you can consider buying at a time of your convenience. For a house is a real asset, it is not purely a financial asset. That means it does something for you – it keeps the rain off your head and means you aren’t beholden to somebody else’s whim for accommodation. There are great advantages to non-financial assets in times of trouble, like the potential end of the eternal growth that industrial civilisation is predicated on.

They hold some of their value, unlike paper assets which can get rendered down to toilet paper by inflation or monetary disasters. But because of its illiquidity, if you have enough money to buy a house cash using the value of an investment portfolio, you are much better placed to tackle the modern world of insecure work and needing to move than you are as a mortgage holder.

I’m in awe of the road less travelled. It wouldn’t have worked for me (and many others) because I was an unsophisticated investor well into my thirties, so I wouldn’t have been able to build capital like Monevator.

My sophistication now is hardly much better, but my results are better, because I have learned so sit on my hands and do not churn my portfolio, and seek income which screens some of the wilder excesses (it’s not as simple as chasing yield which often drives you to excesses).

So the road less travelled is less travelled for good reason. It is hard, and it needs self-discipline and keeping one’s wits about you. Most people do not measure up to the requirements, so the conventional way of exposing themselves to the risk of negative equity and taking twenty or thirty years to pay down a mortgage is perhaps right.

But as M Scott Peck would be only too happy to remind us, there is value in the discipline of gaining the understanding of another way, and developing the skill to do it. Buying young and subjecting yourself to the whims of an increasingly dysfunctional workplace for two decades is not the only way. M Scott Peck would have the hordes of pricedout et al take heed, and perhaps look for the road not travelled. They could take their capital asset with them as they travel the country or continents seeking work. It is hard, because you have to forego the iFads and knuckle down to saving, a discipline which is forced on many in their thirties by the need to pay the mortgage or lose the house.

So I tip my hat to the intrepid travellers on the lonely road less travelled It is hard, but it looks like it may serve some of them well, and they deserve to get to the destination quicker.

Why You Shouldn’t Buy a House

I ought to make a declaration up front that I have bought my house and own it outright.  It’s taken me nearly 20 years to get there though, and the world has changed. And obviously it’s not up to me as to whether you should buy a house, I’m just playing devil’s advocate because nearly everything else you’ll read says go for it 🙂

Here are some reasons you might set against buying a house in today’s market:

  1. Houses are overpriced
  2. You need over 9 years of net income to pay it off
  3. In London? Forget it unless you work for the likes of Goldman Sachs
  4. Paying just the interest? You’re renting from the mortgage company, but unlike with a landlord you can’t make it fix the boiler for you.
  5. You may need to move to follow work.

There’s a strong emotional attachment to home ownership in the UK. It may have served us once, but there is much to be said for a model where renting is more widespread in a world where jobs are less secure than they used to be. Let’s take a look at these items –

Houses are overpriced. A mortgage used to be given on an income multiple of 3.5 times gross earnings for a single person, or 2.5 times joint earnings. This income multiple has stood the test of time; if you need to borrow more than that then the houses you’re looking at are overpriced for you. You can:

  • earn more
  • stump up more capital
  • be less ambitious in your house aims (I wanted a detached 3-bed in ’89, I bought a mid-terrace two up two down 🙂 )
  • move to a cheaper area (I left London – couldn’t compete with the über-rich)
  • give up the idea
  • take ridiculous chances with your personal finances and risk losing money and your home.

Housepricecrash has a chart of real house prices varying over time.

House prices in real terms over time

At the moment it looks like this. From the trend line, perhaps they are not as overpriced as they have been for the last 10 years, however, there is a recession on so I wouldn’t bet on a switchback, personally…

I bought in 1989, and had to sweat through the 1990-2001 hole. There’s no fun whatsoever in paying down on a mortgage that is ‘underwater’ and my net worth is down by about £40,000 in 2010 terms from buying at the wrong time. People even warned me that there were specific factors inflating prices but I was too cocky to listen. You never hear from the people that lose money on buying houses. It happens, but people usually keep schtum about it because success has many fathers but failure is a bastard.

I’m an exception to that because I’ve managed to pay off my house, so I can view this from the other side, it doesn’t still trap me in debt-slavery. Buying that first house was what is so far the one most monumental personal finance cock-up of my life. It dwarfs my second worst PF mistake –  endlessly churning my portfolio and then losing my shirt in the dot-com bust. At least I got some excitement out of that, and learned what not to do!

Everybody talks up the Kodak moments about buying a house. Nobody talks about grinding years of looking at your mortgage statement at the end of the year and making an annual capital repayment of about the price of a secondhand car  so you can at least see an end to it in decades hence. This was around the time when they started to tell me my with profits capital repayment vehicle wasn’t going to repay the capital… A bonfire of fresh twenty pound notes every December would have been more fun than that.

You need over 9 years of net income to pay it off. This mortgage calculator shows that at an average 6.5% interest rate you get to pay back twice the amount you borrowed. So if you borrow 3.5 times your gross salary, you get to pay back 7 times your salary back.

The Government relieves you of about a quarter of gross for a typical basic rate taxpayer, leaving you with 75% of it. Kiss goodbye to 9 years of it if you want to pay the mortgage off in 25 years at an average interest rate of 6.5%.

Things that work in your favour here is that your salary may increase in real terms through job switches, promotions etc. Inflation also reduces the real value of the loan, if we manage to stick with the 2% targeted rate of inflation the real average interest rate is 4.5%, provided your salary keeps up with inflation. That means in real terms you get to pay back 1.67 times what you borrowed, which take out nearly eight years of your net salary.

London prices? They kicked me out of the city 20 years ago and are still causing Londoners problems. The problem is that you’re competing with serious money in the Smoke, both UK wealth from the City and foreign wealth too.

Paying just the interest? You’ll never own your home. Not only that, but you have to fix the damn thing if something breaks, and you can’t up sticks and leave it behind (unless you are in America, where apparently you can simply surrender the house to the bank and walk away debt-free). Seems a lose-lose situation, I can’t understand why anybody goes interest-only without having a strategy to pay the capital, other than for a short period of financial stress. As for those nutters that kept on ramping up their mortgages in equity release schemes to go on holiday, well I not sure they should be licensed to drive any financial instruments whatsoever 😉

You may need to move to follow work. Work is much less stable now than it was in our parents’ generation. Globalisation and the associated ‘creative destruction’ churns companies and job roles faster and faster. Buying and selling a house is stressful and costs money in estate agents’ fees, removal costs and stamp duty. Owning a house makes it hard to get on your bike for a new job. That can seriously damage your wealth, and your health if you end up with a long and stressful commute.

The pros of home ownership are often promoted without a hat tip to the darker side. And one fact is inescapable – nobody who has a mortgage owns their own home. They only own their home when they release the dead hand, by paying the last installment and redeeming the loan. Without a strategy to do that, they might be better off renting instead.