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{ in·deed·a·bly }

adverb: to competently express interest, surprise, disbelief, or contempt

Façade

London is a town of smoke and mirrors. Superficially pretty and substantive on the outside, putting on a show for the Monopoly board tourists. But scratch the surface, and things are seldom as they seem.   

When I first visited many years ago, it was as a penniless teenage backpacker. I remember being both amused and stunned at the contradictions and awe-inspiring levels of deception behind it all.

Big Ben wasn’t.

Buckingham Palace had just won an award for being the ugliest palace in all of Europe.

The London Stone was famous only for being famous, I had seen more impressive paving stones.

Seemingly all the capital’s historical landmarks were perpetually hidden behind scaffolding. Giving me pause to wonder whether they still existed? Or had been quietly sold off while nobody was looking?

Yet despite all that, or perhaps because of it, I enjoyed my visit. Exploring the magnificent green spaces. Dawdling through suburban streets full of grand stucco-fronted houses. Blue plaques adorning the walls every few steps, proclaiming a veritable “Who’s who” of historical figures who had once lived on those same streets.

Ghandi. Kennedy. Keynes. Lenin. Marx. Morgan.

All staying for a brief period, before moving on in search of fame and fortune.

I stayed in a motley assortment of youth hostels and boarding houses. Operating out of once grand, but long-neglected, terrace houses. When viewed from the outside, at the speed of a London bus, they mostly appeared respectable. Impressive even.

The unwitting traveller was destined for a rude shock upon entering however.

Rats. Rising damp. Black mould. Fire exits chained shut. Illegal conversions, remodelling that even the most corrupt of council planning officers would hesitate to approve. Bunk beds and mattresses shoe-horned into every nook and cranny. A lack of functional internal plumbing or any form of heating. The buildings predated electricity, a shortcoming addressed by a creative application of extension leads and a staple gun.

My favourite deceit were the false housefronts located near my lodgings. Set amongst a long row of magnificent heritage-listed Victorian terrace houses were a handful of matching façades with no houses behind them. They hid an open railway tunnel, something the well-to-do neighbours chose to pretend did not exist, no matter how their homes oscillated each time a locomotive passed below.

When I asked the locals about the false houses, they chuckled and recounted stories of enterprising charlatans attempting to “sell” them to aspirational homeowners or unwitting offshore landlords.

Out of curiosity, recently I entered the address of one of those fake houses into a leading property portal’s price estimator. The algorithm guesstimated it would fetch mid seven figures on the open market today. Location, location, location!

This week I ventured back to that neighbourhood, catching up with some backpacking friends of old.

Just like those famous names on the blue plaques, they had invested a couple of years in London to gain education, experience, and enhance the marketable value of their skills before moving on to seek their fortunes abroad.

They were in town on a brief stopover, celebrating the apparent end of the pandemic with a globetrotting adventure. Now comfortably middle-aged, this time their accommodation was five-star luxury rather than the no star doss houses we had once frequented together.

Median house prices are 20x median wages. There is no way my kids will ever own a home.

Stated as a fact. An observation, not a complaint.

Basic economics. Cash flow determines quality of life. When outflows consistently exceed inflows, eventually you end up broke, after waging a losing battle of running ever faster just to remain in place. Anyone servicing a mortgage at 20x their earnings is bound to reach that outcome sooner rather than later.

There” I responded, adding a qualifier that changed the equation. “Will ever own a home there.”

Living location is a choice, not a given. We are only as trapped as we choose to be.

My friend shook his head in disbelief. Bewildered that I would question his assertion or dare to challenge the conventional narrative. Uncomprehending that where he foresaw preordained failure, I perceived a simple lifestyle choice.

He currently rented a large, draughty, and poorly laid out house within a desirable upmarket neighbourhood of one of the world’s most expensive metropolitan housing markets.

His teenage children attended expensive private schools, with all the even more expensive extra-curricular activities that accompanied such an upbringing.

He and his wife drove matching leased SUVs. Upgraded every time a new model was released.

Each year followed a well-established pattern of vacations. Skiing in the winter. Overseas adventures each spring. A fortnight by the beach every summer.

My friend earned well above the median wage, comfortably in the mid-six figures. Yet he was broke.

Living right on the edge of his means. No buffer. No safety net. No shock absorber.

The vast majority of his meagre savings were locked away in his age-restricted company pension.

He was steadily working himself into an early grave. Partly to finance his family’s current lifestyle. Partly, I suspected, to escape the looming financial cliff edge that retirement represented for him.

For all that, he was one of the happier people I knew. Living large. Living fast. Living without fear.

If he or his family wanted something, they just went for it. No compromise. No limits. No moderation.

He had always been this way. It was one of the things that had made him such fun to travel with.

After leaving London he moved to his new home town. There he obtained a self-certifying 100% mortgage, a “liar’s loan” as they were known, and used it to purchase a waterfront dream house. The house was beautifully located, but that was about all it had going for it. Old. Dilapidated. The sort of place described as a “renovator’s delight”, estate agent speak for an absolute money pit.

Renovations were financed via a series of 0% credit cards. First to make it safe. Second to make it liveable. Finally, to make it desirable, the home eventually featuring in several stylish interior design magazines.

A year after he bought it, a storm washed away much of the nearby beach. Each of the residents on his street awoke to discover half their front yards had vanished overnight. Coastal erosion. One house had been swept from its foundations entirely.

Shocked and more than a little alarmed, my friend did some research. It wasn’t the first time that high seas had shown little respect for property rights or man-made structures in his neighbourhood. In fact, the frequency of those once rare events appeared to be increasing. A phenomenon now accepted as climate change, but back then explained away as simple bad luck.

His next building insurance renewal was eye-watering. The one that followed excluded any coverage for flood or storm damage entirely. Insurers recognising that risk had evolved into periodic certainty.

A concerted campaign by residents saw the local council invest money it didn’t have restoring the beach to its original state. The homeowners embraced that all too human combination of optimism and denial, deluding themselves the event was another one-off as they restored their landscaping.

Once the street had recaptured its past glory, my friend cashed out. Let some greater fool roll the dice and hope that the weather gods would be kind. Before long, another big storm washed away the beach again, this time taking several houses with it. Just another one-off. Unlucky.

Throughout his tenure of ownership, property prices had soared. The location had become ever more desirable as the city expanded and its population grew. The tax-free capital gain he realised on selling the house cleared his debts and provided a decent base for starting over.

Feeling flush with cash, his family moved to their current rental, located in an even more desirable suburb. A temporary move, just until they figured out what came next.

A month became a year. A year became two. Two became five.

Their lifestyle upgraded with their address, running with an outwardly more affluent set of Joneses.

Better cars. Better clothes. Better holidays. Better schools.

Over time, the world moved on. Liar’s loans became a thing of the past, while property prices soared.

My friend was soon priced out of buying in his new surroundings.

Not long after that, he could no longer afford to buy where he had previously lived either.

My friend was trapped. Leading a lifestyle he could afford to rent, for now. But not buy.

Relying on his dwindling sale proceeds to supplement his income and sustain his family’s lifestyle. For now.

He lamented having stepped out of the housing market. Losing access to long term leverage, that was neither marked to market nor subject to margin calls. Able to generate tax-free capital growth.

Most of all, he regretted failing to grasp the long term cash flow implications of renting versus owning outright.

My friend made a fascinating observation: tenants and mortgagees are never truly financially independent.

The cash flow requirements necessary to support the tenant’s lifestyle will remain ever higher than someone occupying the same property owned free and clear of a mortgage.

Leading a more precarious financial existence, as rents increase with inflation and market forces. Sustaining that existence demands the accumulation of a significantly larger financial cushion, all while experiencing the adverse cash flow impact of higher housing costs.

I thought about that for a while, and eventually concluded he was right. Of course, some incompetent landlords do subsidise their tenant’s housing costs, but the general case held true.

There is a reason a person’s home, cars, and household possessions do not get included in retirement funding calculations. They can’t be sold off and still used at the same time. Nor are they likely to generate a sustainable income stream. Depreciating assets they may be, but certainly not investments.

As I walked home after our night out, I wandered through our old stomping grounds and ended up in front of those false housefronts, deep in thought.

A landlord’s profit margin is the difference between net rental income and financing costs.

A homeowner “saves” that difference, a cash flow win over the tenants who pay that margin. Cash flow is what determines quality of life.

Pay off the mortgage, and that homeowner’s cash flow “saving” becomes absolute, incurring no further financing costs.

To some extent, those “savings” become permanent. Greatly reducing the financial cushion required to sustain the homeowner’s desired lifestyle for as long as they continue to reside in the property.

The pavement beneath my feet shook as a train rattled through the tunnel below. My inner saboteur was disquiet, resenting having his preconceptions challenged. Surely there must be an opportunity cost incurred by having all that equity trapped in an owner-occupied house?

Foregone investment income and capital growth potential that would otherwise have been generated.

However, I realised that a tenant would also have foregone those investment opportunities.

Their cash flow consumed by paying rent, just as the homeowner’s had been while servicing the mortgage.

A homeowner’s mortgage obligations are time-bound. A tenant’s obligations are infinite.

The only way a tenant could come out ahead was to live somewhere cheaper and invest the difference, which is no longer a like-for-like comparison. The homeowner could have similarly bought somewhere cheaper, incurring lower mortgage payments, a shorter mortgage term, or both. It was the choice of location that determined the outcome, not the occupancy model.

Tenants retain flexibility to make changes more readily than homeowners, a luxury they pay a high price for over the years.

Something tells me that human nature revels in upgrading lifestyle, but is reluctant to voluntarily downgrade it. My friend’s lived experience provided an instructional case study of this in action.

Our desired lifestyle is anchored to our perceptions of location. A deceit, as the happy we seek can’t be purchased, it is something we bring with us when we move. Each location incurs a cost of entry, table stakes for playing the game.

Which may partially explain why unmodernised, un-extended houses in my neighbourhood sell for roughly the same price as those that have been fully extended and recently redecorated. The factors determining the price are location, block size, planning possibilities, and market demand.

Meanwhile, the house sitting on top of that land barely features into the equation. Influencing the length of time it takes to sell the property far more than it does the eventual sale price achieved.

Which in turn explains how a mere façade could potentially command such vast sums. It is the attachment to the perceived lifestyle that goes with the location which drives the price. Smoke and mirrors.

With a mild surprise, I realised I had changed my mind about the merits of homeownership.

I wouldn’t want to buy a home that left me feeling house poor, as my friend was or his children would be should they remain in their expensive locale with its 20x median earnings houses. But I wouldn’t want to retire as a tenant either, forever fearful of inflation and worrying about how to cover next month’s rent.

As I walked home I concluded that my friend’s fears for his children were unwarranted. Not because of the economics, those were sound. Rather, it was another alarming aspect of his climate change research: the forecast future temperature increases.

Ever longer summers.

With ever hotter temperatures.

Bringing with them ever more frequent natural disasters such as floods, fires, and wind storms.

Collectively rendering some popular locations today undesirable, uninsurable, or in some cases uninhabitable in the future.

Perhaps not by the time his children reached our age, but I wouldn’t bet against it occurring by the time their children did.

My friend had foreseen a trend of future climate migrants and refugees, just as he had spotted the dangers of rising seas and fiercer storms.

If things played out as he predicted, a generation of greater fools will be left holding properties where the market price flatlines. Then irreversibly falls. A story we have seen play out many times before. Monserrat, Pompeii, Pripyat, and Varosha to name just a few.

A far cry from the conventional narrative that property prices always increase over the long term.

Yet another deceit.


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31 Comments

  1. The+Bludger 14 February 2022

    Stories and how people their lives is fascinating isn’t it?

    Thanks for sharing.

    The big question is, are you going to buy a house? Personally, I like the idea of owning something I use everyday. I don’t rent furniture, cars or appliances. It wouldn’t make sense. Like you mention, to rent there is another stakeholder and they need to profit. So renting always comes out more expensive.

    • {in·deed·a·bly} 14 February 2022 — Post author

      Thanks Bludger.

      We all have unique and fascinating stories. Different dreams, different drivers, different risk appetites, different time scales. Each seems perfectly rational to the individual, but often bizarre or even crazy to the observer. To each their own, it certainly keeps life interesting!

      Will I buy a house? Maybe one day. The cash flow projection work I was doing over the Christmas break illustrated that I get to a financial happy place sooner as a homeowner than a tenant. But it would be a transaction not without risk, incurring high financial friction (e.g. stamp duty etc) and potentially opening Pandora’s box on home improvements.

  2. ryangibsonclever 14 February 2022

    I really enjoyed this post Indeedably.

    Your description of your friend I imagine is happening all across the country. Pay check to pay check or mandatory outgoings which cannot be removed with a job loss (large mortgage, suvs, gym memberships, private school). It’s interesting how this works. We have friends on the same street who have this lifestyle and while we are riding our bikes or walking our kids to school they are driving their SUVs to private school 15/20 mins away. Interesting dynamic.

    I’ve always bought my property and one of the reasons is purely because the housing stock for rentals is so poor here. Most family homes are bought so there’s no real opportunity for rental.

    We landed ‘lucky’ with our current house (or maybe just good timing?). Offer accepted in January before the original lockdown and a lot of pushing and pulling with the solicitors we made sure the sale went through.

    Subsequent prices in the area shot up (close to plenty of greenery, well connected, suddenly more working at home) and similar houses now sell for 40% more.

    Home improvements can be part of the draw of a property if you frame it right and don’t become a ‘character’ sucker. Efficient layouts, family friendly, adaptable with age. We’ve done this with ours. Not a character property but an incredibly spacious, efficient family home.

    Whether you buy or not is a journey I am looking forward to following. You’re in a different geographical location to me, older children with perhaps less of a reason to take the plunge now.

    I’m here for the remainder of schooling at least. Once this ends…who knows?

    Thanks for writing. It’s reaffirmed that we’ve made some excellent decisions and making sure we live in an area which will always be affordable for this stage of life was right all along.

    Thanks again for the insight.

    Ryan
    PS: Did your friend have a plan or was he/she purely riding things out hoping it will get better?

    • {in·deed·a·bly} 14 February 2022 — Post author

      Thanks Ryan. Sounds like you’re happy and content where you are living, which is winning to me regardless of occupancy status. Well done!

      I think the improvements bit is what we choose to make it. An opportunity to make the “perfect” home to suit a family’s unique dynamics and routines. Or a never ending drain on the wallet, fast fashion writ large in terms of furnishings and decorating.

      Did your friend have a plan or was he/she purely riding things out hoping it will get better?

      My friend has never been one for strategic planning, he follows his impulses and wings it. He is the sort of guy you would go out for a quiet beer at his local pub, and stagger home three days later sporting a black eye, a new tattoo, a wedding ring, and a winning lottery ticket. Unreliable, but certainly not boring!

  3. JBL 14 February 2022

    Reading about other people’s perspectives is facinating. We are all different.

    I think there should be a legal requirement for surveyors to include a risk assessment taking into account of the impact of climate change in their property valuations. Environmental agencies have their own floodmaps and projections and anyone can access these but no-one does. I appreciate some may argue its too long term to worry about, but surely there is an argument its negligent not to say something about this if, say, the property is likely to be in the danger zone in a couple of decades as shown by a flood map. Its a huge can of worms waiting to be opened. I see properties right on the coastline of my area going for well over half a million which could be affected by rising sea levels in a few decades. There is no way I would buy one of them, but people do.

    • {in·deed·a·bly} 14 February 2022 — Post author

      Thanks JBL.

      I agree that environmental factors should be factored into house purchases.

      A while back I viewed a house with a basement, where the estate agent boasted the property had not one but two pumps installed, and consequently had only flooded twice in the last seven years. Imagine the rude shock of buying that place, and then being up for new flooring, carpets, plasterboard and decorating because you ended up with a swimming pool for a basement!

      One of the locations where I hold properties abroad includes it in the conveyancing searches. Come to think of it, the purchasing experience is better all around in that jurisdiction. It is the seller who purchases the survey at the point they put the property on the market. All potential buyers then have access to the survey results before they make an offer. At settlement the buyer reimburses the seller for the survey costs, ensuring each transaction only incurs once survey. That is a win, so too are binding offers, gazumping and gazundering both being illegal, and the whole conveyancing process completing in a fortnight.

      The timescale question is an important one. There is an often quoted statistic that the average Brit moves house once every 23 years. Which suggests that changing climate impacts that will take longer than 20-30 years to materialise are probably less of a factor to worry about than flight noise, pollution, transport links, and so on. That said, we never know whether we’ll be the person who ends up living in the same house for 50+ years!

      • fatbritabroad 19 February 2022

        This is precisely why I’ve changed my mind about paying my mortgage off a few years ago. Not just the opportunity cost but until the mortgage is cleared you always have at least a theoretical risk the house could be repossessed. You’d in some ways be better to have a 95% mortgage and investments to cover it in the future.

        For me I’d rather have the majority of my networth in well diversified pensions and isas than have it all tied up in a house. I’ve got the ltv down to 60% so interest rate won’t be improved

        • {in·deed·a·bly} 19 February 2022 — Post author

          Thanks fatbritabroad.

          I think a lot of it comes down to risk tolerance, expectations, and the resolution of the emotive versus financial eternal conflict.

          Financially, the question is whether housing in your locale will outperform housing elsewhere? Or the US stock market? Or whatever flavour of the month crypto currency is deemed to be the next big thing?

          If yes, then great, invest in paying down the capital portion of the mortgage. If no, then follow the money. That is essentially what the financial investment decision boils down to.

          When people compare the rent versus buy decision, they often compare apples to oranges. Rent versus mortgage interest + maintenance costs is a valid comparison. Rent versus total ownership cost (including mortgage capital repayments) is not.

          As to the emotive side, a person’s home is their castle and all that. Hence the overcapitalising renovations. The endless rounds of mutually assured destruction in terms of extensions and upgrades. The buying too much house, then filling it to the rafters with consumer goods. All feeding our ego, our need for a safe escape from the world, our nesting instincts, and our urge to lead a comfortable existence because we “deserve” it. Financially none of these behaviours make sense, yet we do them anyway because home buying is for the most part an emotive decision rather than one grounded in rational decision making and cold hard numbers.

          • Wildfire 20 February 2022

            Fatbritabroad and I seem to be completely on the same page. After getting to 60% LTV to gain a competitive mortgage rate, I’m struggling to see the point of tying up the rest of my capital in my house as much as I love it. I’m currently on an offset interest only, might move to a 10Y fixed interest only but to be frank, unless things go batsh*t crazy I don’t see me paying this house off in full even though I could.

            Most likely I’ll keep running interest only then downsize and buy cash in 15Y with the 40 – 50% equity I expect to still have in current house. It’s the same with my BTL, anything lower than 75% LTV doesn’t make sense in tying up capital.

            In my eyes the beauty of this approach above is you still have skin in the game
            by being in the housing market, have a low enough LTV to get the lowest rates possible, have adequate breathing room from negative equity in the event of a crash, still get the benefit of house price appreciation, and most importantly still can maintain and grow diversified investments in pensions, isa’s and retain a pot of capital for opportunities in equities or property that may arise.

            I should note that these statements only apply at <4 – 5% mortgage rates, anything above that and I could well change my answer ha ha!

            • {in·deed·a·bly} 20 February 2022 — Post author

              Thanks Wildfire.

              In the past I have used “debt recycling” to release trapped home equity and use it for investing. Back in the day it was one way to make debt secured by an owner-occupied house tax deductible. My rule of thumb has been in the general case investments need to be self-financing. Ideally, each one entirely self-sufficient, although there have been cases where I’ve had some investments prop up others while I engineered capital growth (e.g. renovations, subdivision, title consolidation, re-zoning, etc).

              There are lots of ways to approach these things, a different one for every observer I suspect. Choose what makes you and your family comfortable and free from financial stress.

  4. John Smith 14 February 2022

    When someone puts a lot of eggs in the same bag (buy a house), raising the water level (in decades) is just one of the many dangers. Faster changes are those of drought, pollution, riots / war. (UK is still dreaming of the former empire). Or mass immigration due to poverty; and lack of labor force needed for the pension budget. I see dozens of beautiful houses once, now surrounded by high blocks of 7-10 floors. We can not anticipate the future neighborhood people character, or poor same infrastructure for increased crowd, noise, mess. Nothing is forever.

    It is against reason for a dilapidated house to be worth more over time, with advanced construction technique versus Victorian style. Unfortunately for some, China and Russia against USA + UK and (eventually) Europe will change the price of the UK locations. Other dangers lurk (unknown-knows).

    • {in·deed·a·bly} 14 February 2022 — Post author

      Thanks John Smith. You raise some good points.

      I remember my grandparents commenting on how their neighbourhood in a big city evolved over the decades they had lived there. Starting with returning war veterans, followed by waves of immigration first from southern Europe, then the Middle East, and finally Asia. It was a relatively low cost locale throughout, the sort of place people start their journey but not where people hope to finish up. As kids, we always liked their neighbourhood as it was exciting and there was lots of interesting food shops and takeaway places.

      These days all the old housing has been pulled down and replaced with purpose built student accommodation and “off the plan” buy-to-let apartments marketed to overseas investors. The water mains, sewage pipes, and internet connectivity infrastructure haven’t been upgraded at all, yet there are 10-20x the number of people living in the neighbourhood today. It remains soulless, transient, and somewhere nobody would hope to finish up… yet my grandparents would no longer recognise it.

  5. FI-FireFighter 15 February 2022

    Another good one, thank you for writing it.

    Ref property – I learnt a very harsh lesson very early on in my home ownership that has shaped my financial education ever since.
    1989 – fresh out of the Army I buy my first flat, I think I have got a good deal as I negotiate £6k off the £40k price.

    The only way I can afford the place is a 100% endowment mortgage.

    Then interest rates go up and up ( I didn’t really know what interest rates where!)
    I have £10 per week spare to play football and have a beer every Saturday.
    I start taxi driving in the evenings to make ends meet etc. etc.

    Then I learn a new phrase ‘negative equity’ and I have it. I continue with NE on that flat for the next 9 years!

    The stock market returns over this period are not as expected, so there in also the endowment mortgage problem. Do I have one of these?.., shit!!

    I was only 21 in 1989, I didn’t have a clue and I didn’t have anyone to advise me, (linking to your previous post, my parents were the 3rd gen who blew the family money)
    From then on I made my financial education a priority and I vowed to never go into any transaction uninformed again.

    Long story short, I stuck with property and it has served me well, I was one of the first to get a BTL mortgage for that same flat when I moved to a different area to start a new career in the mid 90’s

    I learnt that NE only matters if you have to sell, property has to be the long game.

    However, NE is awful to live with though, and it affects your decisions and options mahoosively!

    We now have 5 properties (3 BTL, 1 holiday let and our home) and they have served us well.

    I was interested by one of your links on SQ last week regarding property by UK Value Investor.

    He makes some good points and I think we are in unusual financial territory, but I think he missed something – the impact of cycles and the relative values after a crash v the values after the preceding crash.

    A slightly different perspective that I have found interesting and informative is the thought of a property cycle. Loosely around an 18 year cycle as described by Fred Harrison in this book.

    I have used his theory to decide when to purchase and sell properties to my benefit. I think his reasoning stands up and is worthy of considering.

    His cycle does currently have us at a booming stage (steep yearly increases in property prices), but that the pressures won’t cause the bust until 2025-26.

    I have no idea if he’s right and we all know history does not dictate the future, but one of the most seductive features of the 18-Year Cycle is that it is predicated on over 200 years of UK house price data, ranging all the way back to 1776.

    The only thing(s) to disrupt the cycle being world war(s).

    Bit unsettling with Ukraine / Russia currently………….

    You are probably aware of the 18 year cycle etc, but just in case.

    All the best.

    • {in·deed·a·bly} 15 February 2022 — Post author

      Thanks FI-FireFighter. That sounds like quite the rollercoaster ride you’ve experienced, I’m glad it all worked out in the end.

      Here’s a question for you: if you were advising that naïve 21 year old today, would you still steer them into English buy-to-let property?

      Historically, the residential property market has been a fantastic vehicle for wealth creation. I have personally benefitted from it, as have you. But past performance does not guarantee future returns, so it would be interesting to hear your take on it.

      You are probably aware of the 18 year cycle etc, but just in case.

      Thanks for sharing the book link.

      I accept the premise that the property market is cyclical, generally slower to turn than an oil tanker. I also accept that if we pay attention we can figure out approximately where within that cycle we may current sit.

      A while back I did some economic archeology, and pulled together some long term charts of what normalcy looked like. The property price growth rate chart below was one of them. It illustrates the cyclical nature of things pretty well.

      Property price growth rates

      However, I am a bit skeptical of the concept of an “18 year” cycle, it reminds me of my days as a bar useless pouring beers for punters who had almost figured out the perfect system for winning at slot machines. Or the “technical analysis” evangelists who attempt to divine meaning from stock market price charts.

      The narrative tends to get formed and adjusted after the event to fit the facts. “The system works but for…“. A year early. Two years late. A war or natural disaster. But apart from those, 10 out of 13 times it approximately worked.

      So as a rule of thumb, maybe it has some merit. As a trigger or call to action for making major financial decisions, not so much.

      Consider this. Conveyancing on an English property transaction averages 12-16 weeks. 1 in 4 purchases fall through after offers are accepted, costing the unlucky purchaser on average £2,700. Land registry indexes are calculated on achieved sale price, while lender indexes are based on mortgage approvals (that may subsequently fall through).

      So by the time the visible peak or trough becomes apparent on the chart, market activity is already 12-16 weeks ahead. Meaning any decision triggered by that chart is lagging the market by 3-4 months. Not the end of the world in a cycle lasting years, but it means that trying to time the absolute top or bottom of the market relies more on good luck than good judgement. Your mileage may vary.

      • FI-FireFighter 15 February 2022

        Here’s a question for you: if you were advising that naïve 21 year old today, would you still steer them into English buy-to-let property?

        Funny you should ask, my son is 21:-)
        He finishes Uni this year and is itching to get out into the wider world.
        He is interested in property (he has seen how it has benefitted our family) and he has seen me become FI at 53 and he wants similar.

        So……… we have discussed the various routes into property and I have advised him to not go specifically/initially into BTL now.
        Rather to follow the ‘House Hack’ of lodgers/house share.
        He will be buying a property later this year (with a bit of help from us that he will pay back) and will look for people to house share with him. The idea being their rent covers the mortgage and allows him to overpay.
        His wage will be used to have fun and also to invest in index funds for his FI.
        After a few years, he will remortgage to give himself the deposit/opportunity to buy another house, the original house now becoming a BTL.
        He then has the options to repeat the process or to make the second home his own.
        He understands leverage and is getting to grips with risk, it will interesting to see how this works out for him.

        We have a property company with one of the BTL’s within it, we are likely to buy more periodically when we find the right property etc, with income generation being the goal to assist the whole family choose the lives we want to lead.
        My son is also interested in developing properties again having seen me do it, so we will likely work together on this in the future.

        My reason for not bailing on BTL’s as others have are –
        Inflation hedge
        Supply and demand, there will always be people who need to rent.
        Follow you own set of parameters and due diligence and I think the numbers stack and its worth the effort.
        Combine with index funds – do not just have BTL’s
        Only do BTL with a long term view
        I have an experienced accountant who understands property investing and I value his opinion.

        I agree with your points ref the ’18 year cycle’, at its best its a vague guide and not to be followed literally.

        When I said –

        I have used his theory to decide when to purchase and sell properties to my benefit. I think his reasoning stands up and is worthy of considering.

        I was talking in years and I should have added his wasn’t the only info I used -Buying when others were saying ‘it’s going to crash’ yet it didn’t/hasn’t yet and also selling when others were saying ‘property can only go up, in 2006’, for me was only really possible because I had read his book and felt I had a greater/wider understanding of the multiple factors that affect the property prices. I was also lucky.

        I look at as many factors as I can, I try to drown out the noise especially from the media and definitely don’t try to pick the peak or bottom. I just try to be on the right side of the movement/trend.

        Your comment – So as a rule of thumb, maybe it has some merit. As a trigger or call to action for making major financial decisions, not so much.

        Is spot on.

        There is a nice simple diagram here which I like and use when I introduce people to the concept-

        Image credit: Wikipedia

        Most property transactions are dictated by life circumstances and include buying and selling, so are somewhat moot to any cycle, so this diagram means nothing.
        But if you are just buying and are able to avoid buying during the ‘winners Curse’ period you should be ok.

        • {in·deed·a·bly} 16 February 2022 — Post author

          The house hacking route is a good one, providing he is still young enough/patient enough to endure flatmates. Benefit from leverage, someone else services the interest, and he banks the capital gains.

          Question is, will he buy it via Limited Company, with the (partial) tax relief on mortgage interest that option offers?

  6. Bob 15 February 2022

    What a fascinating article. It reads almost like the opening chapters of one of those popular thrillers. Maybe Mark Dawson. Globe trotting youth turned genius financial wiz. Revisiting old haunts. Was there a shady government career in your friend’s past?

    • {in·deed·a·bly} 16 February 2022 — Post author

      Thanks for the kind words, Bob.

      Was there a shady government career in your friend’s past?

      Shady? Yes. Government? Not as far as I’m aware.

      During our time in London together my friend started out as a tour guide on one of those open top buses. Which was a problem, because he didn’t know anything about London. I remember him telling a story of how he visited one of those remainder book stores and paid £1 for an illustrated kid’s history of London book. That, combined with his imagination, formed the basis of his narration for the tourists.

      Later, he got a job steering temporary workers from the Commonwealth into offshore tax vehicles to avoid paying National Insurance and reduce their income tax bills.

      His time in the UK came to an abrupt end when he was returning from a last minute snowboarding holiday, only to discover at the immigration desk that his visa had long since expired.

      Now he is some sort of heavyweight programme manager at one of the big consultancies. From what he described his job involves spending 12-15 hours a day, 6 days a week, attempting to deliver poorly scoped projects with perpetually inadequate resources after the firm underbid yet again to win the job.

      Shady all around really!

  7. weenie 16 February 2022

    Hybrid working / not having to commute (as often) should hopefully give you more choice on where to purchase your home, although with school age kids, there’s that limitation to consider first. Decisions, decisions.

    I have a big list of home improvements required, but having shelled out already for the necessary stuff to be done, I’ll just slowly save up the funds for the rest to be done in time. I’ve heard of people taking out loans to do this kind of stuff but it’s not something I would consider, probably not even a family loan (as that would no doubt give them licence to have a say in such home improvement!).

    It’s funny, I think living on the financial edge (including keeping up with the Joneses) seems to mostly affect people with kids, ie their kids going to the best schools, arriving at the school gates in nice new family car, telling their friends about their nice skiing holidays and interesting after school activities. My inner circle of friends are all child-free and none feel compelled to aspire to that kind of lifestyle or peer pressure (age group millennial & Gen X, mix of married, single and divorced). That said, we probably save a ton of money just by not having to go on holiday during peak times!

    • {in·deed·a·bly} 16 February 2022 — Post author

      Thanks weenie.

      I think one of the most important, yet least discussed, aspects of Personal Finance is choosing the Jones’s we subconsciously run with.

      Any social group includes a self-perpetuating set of expectations and pressures. Yours sound kid free, comfortable in their own skin, and financial sensible. A great choice.

      I’ve worked at investment banking and private equity client sites where the staff were involved in a endless arms race for the shiniest luxury toys and best addresses. They mostly earned small fortunes, but spent big ones maintaining appearances.

      In hindsight, one of the kindest things I did for my elder son was pulling him out of an also-ran private school (where he was a tiny fish in a very rich pond) and sending him to a great state school (where he was the richest fish in a poor pond). The kids were mostly the same, some good, some bad. But the perspective of normal and sense of balance he gained was priceless.

  8. WildFIRE 16 February 2022

    Excellent post to read, very enjoyable. Where did you finally land up with regards paying mortgage off and tying up capital versus investment that money in BTL and ISA?

    I missed the best of the glorious 2011 – 2021 equities run as I was too pre-occupied with paying off my offset mortgage by 40. Looking back I was uneducated and naive regards the stock market and dot com and 2009 crisis plus 5 – 6 % interest rates were too fresh in my mind.

    I got into the position to pay off the mortgage in 2020 but instead decided to purchase a couple of BTL and pumped the rest into Vanguard index funds. The idea was to keep funding ISA’s for the next 10 years then comfortably slip into FIRE, knowing I would still have 15 years term left on my offset mortgage until the balance was due. At which point I’d probably sell and downsize to purchase in cash.

    I’m now re-considering as inflation bites and interest rates creep up. The lure of 10Y fixed at 1.89%, taking out a little equity (opportunity money) at the same time is tempting but it means trading in my fantastic offset mortgage which is at 1.74% above BOE BR. Repayments are ok and perfectly manageable, but if BOE BR goes above 2% (who knows) then i’m going to feel a bit silly for not fixing and paying back double the amount of interest I needed to. Alternatively I would need to divert future savings to offset mortgage rather than ISA to reduce the balance and repayments.

    I guess it’s a trade between 10Y of repayment stability but then needing to either repay the mortgage or find another solution for the remaining 10 – 15Y…. or just take the flexible 25Y route and accept the risks and pivot my strategy along the way. Difficult!

    • {in·deed·a·bly} 16 February 2022 — Post author

      Thanks WildFIRE.

      I guess it’s a trade between 10Y of repayment stability but then needing to either repay the mortgage or find another solution for the remaining 10 – 15Y…. or just take the flexible 25Y route and accept the risks and pivot my strategy along the way. Difficult!

      Which distills down to certainty versus chancing the unknown.

      For what it is worth, average interest rates in the UK over the last 300+ years are over 4.5%. The current low rate environment is an anomaly when viewed in that historical context. That doesn’t guarantee a future outcome, but does give a pretty good steer on where “normal” rates tend to sit.

      How does your decision change if you were looking to refinance in 10 years time and discovered your repayments would more than double?

      Where did you finally land up with regards paying mortgage off and tying up capital versus investment that money in BTL and ISA?

      I look at where I perceived the greatest total return to be, and put my money there. That said, buying an owner-occupied house or choosing to pay off its mortgage is largely an emotive decision. In a world of negative real interest rates, from a financial perspective the decision to not to pay off a mortgage would be a no brainer for me, but everyone is different.

  9. Wildfire 16 February 2022

    I also tracked the base rate over a lesser period, about 100 years, and came to a similar conclusion but I do wonder two things… Can the world’s government and personal debt levels survive with that base rate, I’m not convinced. Also, considering such rapid house price growth, is 2% of a high amount equivalent to 4% of a lower amount.

    Luckily, or not as it may be, I remember paying mortgages rates in the region of 5 – 6% just before the 2009 financial crisis, alebt on repayment rather than offset interest only. For sure the monthly payment was more painful, and that’s probably what spurred me on to get rid of the mortage from 2010 onwards before getting to 2020 and realising I’d largely missed the equity gravy train. It’s a funny old world.

    Looking ahead, 10 years down the line, it’s impossible to tell again. However, I’d hope that the house would be worth no less than it is now, ideally 2 – 3% growth per annum (East Scotland) and that my ISA would also have grown if even just with new contributions and a low to moderate level of growth of 2 – 4%.

    I’ve got my remortgage application in anyway for the 10Y fix at 1.89% and 50k equity released for any stock or property opportunities that present themselves. I figure that as long as I can secure an offer, with six months to draw it down, I can see how things pan out with inflation, interest rates, energy prices etc. Worst case I just sit on it and bin it.

    I do think there is merit in the 18 year property cycle as discussed earlier. There is probably some similar theory on the stock market. I remember post dot com in early 2000s property had high growth which accelerated for the last few years, whilst stocks had moderate growth, then both crashed down (albeit at lesser levels) around 2009. Then from 2010 – 2020 equities had high growth which accelerated for the last few years, and houses had moderate growth. There was probably a period of parallel good growth for each, then an inflection point where one took over the reigns from the other. I really should stick all this in a timeline to get it out of my head and see if it stacks up.

    Hypothetically, on that theory, we might get a little bit more equity growth for unloved areas of the market (UK, EM, value, commodities) meanwhile houses are going to keep growing perhaps for a few more years. Then we’ll likely see some sort of crash down again with houses around 20 – 30% and equities perhaps more. So this seems a good time to keep hold of your leveraged properties, fix your borrowing costs, extract any recent equity gains for a rainy day then after the next crash (reversion to mean) start hoovering up stocks and shares for the next decade whilst they are in recover mode ha!

    • {in·deed·a·bly} 17 February 2022 — Post author

      Can the world’s government and personal debt levels survive with that base rate, I’m not convinced.

      They have before. They will again. People will adjust. Life goes on.

      Also, considering such rapid house price growth, is 2% of a high amount equivalent to 4% of a lower amount.

      As an absolute payment amount yes. But when rates go from 2% to 4%, that ends up being 2x the the cost of servicing the debt. Do people then experience housing distress? Maybe.

      That said, Schroders had an interesting commentary about UK housing and affordability. It has been a lot worse, but not for a long while.

      There is probably some similar theory on the stock market.

      Probably. Wait long enough for the lessens of the past to fade from “living” memory, and history tends to echo. Case in point is the dismantling many of the controls and protections that were brought in after the financial crisis, the profit motive proving too strong for captive regulators and store bought governments to resist. Swap crypto for dotcom and the media narratives are much the same, as speculators confuse luck for skill.

  10. Malcolm 17 February 2022

    Just my thoughts
    Always wanted my own house so bought the very small house I was living in (provided free for new employees but to be bought after becoming a partner in the business )
    Essentially a small stone built cottage -seemed expensive at the time but both wife and I working so not really much of a financial burden
    Kids(3) their education and holidays were our two main priorities -added 1room and kept cottage well maintained and warm(remote area in Northern Scotland)
    An endowment mortgage that luckily actually did pay out over the buying price which tells you how long ago it was take out (1975)
    A bigger house which is common amongst my contemporaries never became financially feasible
    Kids now long gone and the small house is very suitable for a old retired couple
    Looking back now I think we made the right decisions
    You certainly need a roof out of the rain and warmth but that’s it-more is wonderful-if you can afford it -but life has many more important priorities that also demand major cash outlays
    Successful kids for instance are a constant delight but they cost
    Summer holidays in a more sunny area (France) than Northern Scotland were a yearly necessity for a hardworking family
    You pays your money and makes your choice!
    xxd09

    • Wildfire 17 February 2022

      xxd09 a bogleheads legend if ever I’ve seen one! I love reading your posts, such well rounded, sensible and timeless advice. I always check out your thoughts when I’m getting tempted to go rogue (active!) ha! I never realised you were a fellow jock.

    • {in·deed·a·bly} 18 February 2022 — Post author

      A great approach Malcolm, sounds like it worked out beautifully. Truth is, you’d most likely have been on those summer holidays to France no matter the size of your house (and mortgage), so it really came down to prioritisation decisions and personal preferences on the housing front.

      I think that may well be the first time I’ve ever heard someone use remote Northern Scotland and warm in the same sentence! Not my experience, but then my strongest memory of the area was it being freezing cold after I once skinny-dipped in Loch Ness in February.

  11. dearieme 19 February 2022

    “the dangers of rising seas and fiercer storms” – nil. Catastrophic Anthropogenic Global Warming is a scam. Phoney baloney. It follows that there must be a way of making money from its eventual abandonment. What can it be?

    • {in·deed·a·bly} 19 February 2022 — Post author

      Thanks for sharing your thoughts, dearieme.

      It follows that there must be a way of making money from its eventual abandonment. What can it be?

      That would be the traditional “sin” stock portfolio. High yield. Low growth. Strong moat. Predictable returns. In other words, the content of your typical dividend investor portfolio, containing shares in companies who profit from natural resources via digging up, cutting down, or killing. Throw in the firms in the business of addiction (alcohol, caffeine, gambling, pharmaceuticals, sugar, and tobacco) and it offers a remarkably diversified defensive portfolio for conservative investors.

      Whatever your thoughts on the climate change science, the real money at the moment is riding the ESG wave. Rebrand with a “green” or “eco” in the name. Write some vague waffly mission statement full of corporate doublespeak about how the firm’s ethos strives to save the rainforests and leave a better world for our grandchildren. Jack up prices, and sell into those seeking to assuage their collective social guilt by paying an idiot tax to purchase the products and services of companies who are no better or worse for the environment than their peers but just smarter at marketing.

      Is the same branding playbook applied to themes ranging from diversity, equal opportunity employment, organic, Fairtrade, to GM-free in recent years.

      Eventually the gravy train ends, everyone is deemed to be sufficiently ESG aware, and the herd runs off after whatever the next trendy social issue happens to be.

  12. Andrew 19 February 2022

    Great post, and as someone in my mid-30s earning £200K/yr in London, very relevant to me.

    With London rental yields at ~3-4%, and interest rates much the same, the ongoing raw financing cost of home ownership just isn’t that interesting to me in the context of rent vs buy.

    Opportunity cost on the other hand, is everything.

    In 2022 house price inflation isn’t necessarily a reliable friend. Sure, if house prices continue to rise, by just even 1%/year for the duration of your owner occupancy, then you can make a claim, thanks to leverage, that your mortgage deposit was well invested. But what if they don’t? What if, in the face of 10x median earnings prices, they actually fall or stagnate? Using a huge 6 figure deposit to buy a pile of drafty bricks doesn’t look so great then.

    However, most people aren’t taking out interest-only mortgages. The banks simply won’t provide them to you (unless you have a bulletproof repayment plan, loads of wealth socked away, and a <=75% LTV).

    This means what you really have to weigh up is the impact of the repayment part of your monthly mortgage outgoings and the opportunity cost of paying down a paltry 3% mortgage when the market could be returning much higher returns.

    Over a 25-30 year mortgage, that could make a huge difference

    • {in·deed·a·bly} 19 February 2022 — Post author

      Thanks Andrew, you raise some excellent points.

      At their heart, most investment decisions are bets on future expectations. We calculate the probabilities, factor in our risk tolerances, and then roll the dice.

      The greater fool theory says London property will forever remain in high demand because it always has been in the past. The centre of the empire. One of the world’s great financial centres. Renowned far and wide for its justice, fair regulation, and strong rule of law.

      Except a recent independent observer may question whether all (or any) of those points remain true? Personally, I suspect London’s, and by extension England’s, best days are in the rearview mirror. Which raises some troubling questions about where the next batch of greater fools will come from? At the current time they aren’t foreign students, migrant workers, ambitious professionals on generous ex-pat packages, nor anchor migrants gradually importing their families (and their family’s money) from abroad. And without that influx of new blood to keep the population growing, drive up demand, and push ever higher those overpriced properties, where does the driver for future price growth come from?

      Which to my way of thinking makes house buying an emotive issue. Perhaps wanting to provide stability for a young family. Maybe cheaper than a divorce. Possibly little more than FOMO and an overwhelming desire to mix it with the Joneses. In such a case I suspect the “return on investment” is measured by feelings, a sense of satisfaction or security or pride or accomplishment. Something that has the householder sleeping soundly at night, perhaps comforted in a way that no stock, bond, investment property, or crypto speculation could hope to match.

      Of course that is just a theory, everyone’s motivations and drivers are different. I simply accept that buying a house is probably not an optimal investment decision, yet most folks do (or hope to do) it anyway.

      We have to sleep somewhere, after all!

What say you?

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