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.