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{ in·deed·a·bly }

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

Liquidate

Conventional wisdom says not to invest cash you will need in the next 12 to 24 months.

The theory goes that over the long term markets rise more than they fall, but rarely when we want them to. Attempting to meet definite financial commitments using investments with uncertain valuations would be tempting fate.

Which is sound reasoning.

Picture how unsympathetic the tax authorities would be if you had bet all the money earmarked to pay your income tax bill on some hot new cryptocurrency pump and dump scam. Try explaining to your loved ones that you lost the kids’ school tuition or your elderly parents’ care home fees in a contrarian Russian Ruble FX play that didn’t pan out.

So far, so sensible.

But what if your funds are already invested?

Where is that house deposit you have been diligently squirrelling away since the day you finished school?

Sat in a savings account, having its purchasing power eroded while earning a below-inflation return?

Maybe quietly compounding away, invested in low-cost passive index tracker funds?   

Perhaps it is sunk into speculative crypto and NFT holdings, hoping for a repeat of that get rich quick action, circa late 2020?

How long do you trust your hard-earned savings to the whims of the market gods? At what point do you cash out, the opportunity cost of uncertainty outweighing the benefit of potential future gains?

Consider the journey of a typical first home buyer.

Grinding away at the start of their career. The marketable value of their time a mere fraction of what it may one day become. Working. Renting. Attempting to save. Little flowing in. Lots flowing out.

After a year, or ten, their number reaches critical mass.

Sufficient to secure a home loan, without being stung for lenders’ mortgage insurance. A threshold below which aspirational owners can’t reliably afford the properties they wish to purchase.

After years of watching from the sidelines, the ambitious homebuyer commences their house hunt.

Beginning with dreams of a Grand Design.

Well located. Reasonably priced. Potential to add value. Instagram worthy, the envy of their friends.

Then they filter the property listings by their budget. Stare in horror at the struggle-town locations or tiny shoeboxes they can actually afford. Shake their head in dismay.

A trade-off ensues.

Wait longer and save more.

Alternatively, compromise those dreams and settle for less. Much less.

Or perhaps purchase their desired lifestyle by increasing commuting times. Missing the irony that in doing so they will have less time to enjoy the quality of life they are attempting to buy. Not in the real world, where the pandemic induced promise of remote working by default has proven to have been nothing more than a rapidly fading fever dream.

Every property they enquire about is already under offer. A frothy market, demand exceeding supply.

Learning to respond to new listings with the speed and precision of a Formula 1 pit crew.

Investing less time viewing the property than they take to choose what to eat from a restaurant menu. Then making the largest purchasing decision of their lives based on that fleeting first impression.

Those scarce moments subjected to a monologue of pressure tactics from a smug estate agent. Queues of anxious buyers lined up. Racing against the twin threats of rising interest rates and rising house prices. Multiple offers already received. Competing against chain-free buyers backed by the bank of Mum and Dad, and cashed-up developers seeking their next renovation project.

Eventually, the property seeker may have an offer accepted.

Survive the gazumping gauntlet.

Get to the point where contracts are exchanged and financial obligations become inescapable.

Now the aspirational buyer has to come up with the money.

House deposit. Stamp duty. Legal fees. Bank fees.

Thousands.

Tens of thousands.

Hundreds of thousands.

Occasionally, millions.

There is just one problem. The markets have moved against them.

If their deposit had been held in cash, this wouldn’t matter. Observed with disinterest. Perhaps relief.

However, if they had stayed invested, the value of their portfolio in that moment may now be less than they had based their numbers on.

At the time of writing, the Hang Seng and S&P500 indexes were both down 12% year to date. The fall in the DAX, Nasdaq, Nikkei, and Bitcoin was closer to 15%. Ethereum and the MOEX Russian index had lost in the region of 30% of their value. Each a potentially pucker factor inducing reduction in wealth for that aspirational homeowner, who was banking on converting their portfolio into a house deposit.

Of course, the markets could just as easily have risen by 12% during that period. At which point the same homebuyer would be declaring themselves an investing genius with nerves of steel. Perhaps getting to purchase their house “for free”, as market gains rather than hard-earned savings provide all the equity they contribute to the deal.

Given the vast earnings multiples that housing located near decent employment prospects command, this liquidation timing question is a financial conundrum faced by many.

A real-world example of risk versus reward in action.

Next, consider the tax implications of that anticipated change in asset allocation.

With careful forethought and proper planning, any investments would have been held in accessible tax-advantaged accounts, such as stocks and shares ISAs.

But how many of us knew about tax advantaged accounts straight out of school?

By the time the novice investor had learned enough to know about ISAs, and earned enough to worry about legal tax avoidance, their investment holdings may have been compounding for years.

After the impressive bull run that global markets enjoyed in recent years, there is potentially a hefty accrued capital gains tax liability just waiting to be crystallised by an asset sale event. Up to 28% of those hard-won gains instantly evaporating at the decision to sell. Ouch!

Some aspirational homeowners may apply lateral thinking. Remembering that taxes are usually optional.

Some may elect to borrow against that taxable investment portfolio, rather than liquidating it.

No capital gains realised.

No taxes incurred.

From a cash flow perspective, a margin loan secured by an equities portfolio can incur lower financing costs than an equivalent sized interest-only variable rate mortgage.

But the two are not like-for-like propositions.

The asset securing a traditional mortgage is valued just once, at the inception of the loan. From that point onwards, buyer and lender mutually pretend the property will retain its value for the duration of the loan.

A margin loan is marked to market. Every day a nervous lender weighs up the value of the portfolio securing the loan against the size of the outstanding debt. When prices rise, everyone sleeps soundly. Should prices fall however, things may get exciting.

In reality, margin loans won’t work for the majority of homebuyers.

Loan to valuation ratios are capped at much lower levels than mortgages. Margin lenders start to get antsy if leverage levels climb above agreed levels, often lower than 50%. Which means that the taxable portfolio securing a margin loan would need to be worth at least double the amount that the aspirational buyer wished to borrow.

A tall order for someone who has been struggling to squirrel away their deposit!

So instead, the wannabe homeowner sells down their portfolio. Eating the fees. Taxes. Purchasing power erosion. And opportunity costs of foregone potential investment gains.

Using the net proceeds to buy themselves a home.

While the outcome is relatively certain, the timing of that move to cash is anything but. The correct answer only knowable in hindsight. Driven by a desire for peace of mind and financial certainty. A seldom discussed aspect of the buying process, but one that has potentially vast implications for the speed and growth trajectory of the homebuyer’s wealth.


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21 Comments

  1. Jimbo 13 March 2022

    Timely article. Sold down our S&S ISAs at beginning of year as our house search ramped up. Wasn’t happy with it at the time as sold at a ‘loss’ compared to December but at the the market was dropping on a daily basis. Placed the £ in premium bonds for safety.

    Now we can’t find any suitable houses and considering fixing a rental for another year. Our landlord has sold the property we are in so 2 months doesn’t give us much time.

    So do I maintain premium bonds. Or drip feed back into S & S as i enjoy wstching them rise over time. Think I will likely do the latter. I never win anything with bonds anyway.

    Fingers crossed the cost of living crisis kicks the housing market back to affordable levels. Personally won’t mind paying a higher interest rate if the house I buy isn’t priced too high.

    • {in·deed·a·bly} 13 March 2022 — Post author

      Thanks Jimbo.

      It’s funny how quickly we become accustomed to higher valuation levels. A rise in December is barely noted, yet a subsequent fall in January by the same amount would be keenly felt even though the prices returned to what we were perfectly happy with back in November. We all suffer from this recency bias, human nature is fascinating!

      Fingers crossed the cost of living crisis kicks the housing market back to affordable levels

      Question for you: what does an affordable housing market look like? I don’t think I’ve ever seen one.

      Do prices need to be cut in half to bring price to earnings multiple down to Earth?

      How would that play out in your local community, with a generation of overextended borrowers finding themselves trapped in a negative equity scenario? Fixed term honeymoon rates expiring, pushing people onto rapidly increasing standard variable rates as inflation soars. Housing stress fuelling on familial discontent, perhaps increasing divorce rates and domestic violence. Climbing numbers of people filing for personal bankruptcy. Failing small businesses as homeowners tighten belts and reduce discretionary spending.

      I can see prices treading water for a few years, indeed I think this is quite likely so long as the post-Brexit “Fortress Britain” attitude towards migration persists. However, it is harder to see what would trigger a sudden marked decline, like that experienced by the share and crypto markets of late. It isn’t impossible of course, it has happened a couple of times in the past.

  2. Jimbo 13 March 2022

    For me I want a return to 2019 levels, circa 15-20 % drop, there was no need for the government to chuck a prop (stamp duty holiday) that effectively stopped people paying 10k in tax by buying a house for 10 per cent more during covid. Anecdotally where I live on edge of London price has increased by 10% since December just due to scarcity, I.e stuff falling through gets relisted at 50k more and sells within a couple of days

    • Jimbo 13 March 2022

      Adding to this. Some folks may unfortunately find themselves in negative equity but might only be a year or two. I wonder if older folks might see the rising living costs as a nudge to bring forward their downsizing plans? And perhaps interest rate rises force a few BTLers to exit the market? Or is that wishful thinking 🙂

      • {in·deed·a·bly} 13 March 2022 — Post author

        Thanks Jimbo.

        Agree the stamp duty holiday was a silly idea, a subsidy for the property industry (estate agents, movers, developers, etc). It succeeded in doing was pouring fuel on property prices, which was what it was designed to do.

        Many old folks shouldn’t still have mortgages, so the interest rate rises wouldn’t impact them greatly. Of course, that assumption only applies to those old folks who weren’t like all those lemmings who hop from short term fixed rate mortgage to short term fixed rate, extending the mortgage term each time!

        It will be the numbers that drives accidental/private landlords out of the game. Low yields and predatory tax regimes are already driving that outcome, so higher financing costs will only hasten it.

  3. Impersonal Finances 13 March 2022

    I am guilty of putting my emergency fund “to work” in some frothy growth stocks that have gotten annihilated–and may not come back for a while. Fortunately I don’t need the money at the moment. That is, until I do. That’s why they call it an emergency fund! In the meantime, I’m playing it a little too close to paycheck-to-paycheck after reaching my ambitious savings goals each month. We’ll see how those investments look in a few years and reevaluate, assuming I haven’t had to liquidate at some point.

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

      Thanks Impersonal Finances.

      There are lots of types of emergencies, requiring different speed of response. Only a select few need cash on the spot. Most can be managed within a credit card payment cycle, providing you have or can get the cash to cover the bill when it comes.

      Therein lies the challenge with having all your funds invested. If the “emergency” occurs after your investments have gone to zero (see the recent Russian oligarch experience) or your funds are inaccessible due to something like your broker having gone bust but their client book not yet taken over by a new broker, then you’re pretty much screwed. These are low likelihood, high impact events where the downside outweighs whatever return those investments may potentially bring.

  4. David Andrews 14 March 2022

    Around 2 years ago I was trying to decide what to do with my “spare house” which I’d retained when buying a family home with my partner. The agent and I remarked how ambitious the chap a few doors away was being with his own asking price.

    Jump forward 2 years and the asking price of my “spare house” has jumped by another 40%. Of course a lot of other properties have increased by the same amount or more it’s not a great benefit really.

    I recall several years ago some households sold up and moved into rental properties as they predicted a decrease in house prices so they could buy back in later. I wonder how that worked out for them ?

    I’m now speculating on the price of my “spare house” outpacing the growth that could be obtained by liquidating it and investing the funds instead. In the case of property you also need to factor in the cost of liquidating now and transnational fees incurred when buying back in later.

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

      Thanks David.

      I’m not sure that stepping off the property ladder and then hoping to get back on approach ever works in practice. Often times those folks get left behind. Same for those who sell up in the big smoke and move out to the sticks, only to discover it was a financial one way trip due to escalating property prices in their former locale.

      Good luck with the property speculation, hopefully it helps fund a comfortable early retirement when the time comes.

  5. weenie 14 March 2022

    “Then making the largest purchasing decision of their lives based on that fleeting first impression.”

    This was me last summer, with the property market red hot due to people madly trying to buy and complete before the end of the stamp duty holiday. I made my offer (above asking price) based on a 10 minute look around (yes, I spend longer looking at a menu!) It did help that I sort of knew the area and where it was in relation to all the locations which were important to me. I paid more than I should have but I don’t really care – I see it as a home, not an investment.

    Fortunately, most of the funds I had for the deposit was in cash (premium bonds – I’m glad I didn’t invest all of my redundancy money!) and the remainder, I was able to sell equities for profit (though not at their peak). It was hard enough selling then, I can’t imagine having to sell now, in the current situation!

    There seemed to be no signs of the apparent housing bubble bursting but with the war and cost of living going up, something has got to give, it can’t go on like this, surely?

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

      Thanks weenie.

      You’re fortunate in that you knew the area well, knew what you wanted, and had done your homework. That allowed you to make the decision quickly.

      I’m not sure about your neighbourhood, but around where I live the houses are all pretty much the same so apart from badly done renovations or nasties revealed by a building survey, once you’ve seen one you’ve pretty much seen them all. Makes the deciding easier!

      I hear you on the housing bubble. Makes little sense to me, but collective delusion and government policy purpose built to keep prices rising seem to go a long way.

  6. Claire 16 March 2022

    I don’t often have reason to be grateful for the housing market in Denver, but reading about the UK experience definitely puts things in perspective! Yes, home costs have vastly outpaced wage growth here, and yes it’s increasingly hard to get into a first home when competing with deep-pocketed investors, but at least the actual process seems less fraught…I had to look up gazumping and gazundering – not something that we have to deal with here.

    I bought my first home, a (very) small condo six years ago. I scraped together everything I had, and then some, took advantage of a first-time homebuyer’s program for a low down payment loan with no mortgage insurance, and then lived on a bare pittance for two years until my salary actually caught up to my cost of living. Several people (otherwise fairly wise) said that I should wait a year or two, because prices were sure to even out/come down. If I had listened, I never could have caught up.

    I just sold that condo for 187% of what I paid. And it still wasn’t enough for me to get into an actual house on my own. Fortunately, I have good friends who were just as willing as I to think outside the box – we co-purchased a large ranch-style home with a walkout basement, and split it into a duplex. We were lucky – no one else wanted such an oddly configured house, with only one legal bedroom in the basement, no garage, and ‘only’ two bathrooms. But for our two households, it fit the bill perfectly!

    Of course, getting the house is just the beginning. So many first-time homebuyers I know didn’t realize how much they would need to spend on projects in the early flush of ownership. Fixing issues of delayed maintenance, addressing ‘what were they thinking’ renovations by a previous owner, and just making a house feel like a home – it all comes with a price tag…

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

      Thanks Claire. Congratulations on your recent purchase, I hope you find happiness there.

      It isn’t all of the UK which has a broken property purchasing system, for example Scotland’s system is far more sensible with binding offers and no gazumping.

    • weenie 16 March 2022

      “So many first-time homebuyers I know didn’t realize how much they would need to spend on projects in the early flush of ownership.”

      You hit the nail on the head with this, @Claire.

      Lots of throwaway comments about renting being bad but first time buyers forget/don’t realise that when things break down in the house or need fixing, they can’t ask the landlord to sort it out for them.

      • Andrew 19 March 2022

        Everything you’ve written is eerily applicable to me.

        I liquidated everything on December 17th to extract a house deposit. My strategy was to sell everything in the S&S ISA and transfer the balance to a flexible cash ISA. If my house hunt fails (it hasn’t yet begun) then at least I can retain the tax shelter. Like others, everything outside the ISA went in to Premium Bonds, allowing me to fantasize that I win the million and can stop looking at shoeboxes and damp London Victorian homes chopped up in to strange configurations of flats.

        The falling markets have given me some FOMO relief but I daren’t feel smug. We got lucky.

        My choice of timing was the realization that we would meet our savings goal by April, and no longer needed the market boost. Investing monthly throughout 2020 and 21 shaved a good 4-6 months off meeting our deposit target, so this risky strategy served its purpose.

        Interest rates going up 0.25% twice so far this year has shaved £50K off our house budget. Prices are still going up.

        There’s no strategy to deal with this. Something has to give.

        You shouldn’t have to be a millionaire to start a family and have less than a 90 minute commute to Zone 1. You shouldn’t need to gamble short term in the stock market to build up a deposit before you’re 40.

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

          Thanks Andrew. Good luck with your house hunt. It is great you are self-aware enough to distinguish good fortune from good judgement, when a gamble pays off many people have trouble telling the difference.

          You shouldn’t have to be a millionaire to start a family and have less than a 90 minute commute to Zone 1. You shouldn’t need to gamble short term in the stock market to build up a deposit before you’re 40.

          I’m not so sure about this. Property prices are determined by supply and demand. If there weren’t a bunch of people who could afford to pay a million for a dodgy Victorian terrace or a shoebox flat, then those properties would sit on the market unsold until their current owners tempered their ambitions.

          The question then becomes who are those people?

          They aren’t on the median UK household disposable income (£29,900), which only grew by 7% over the last decade. But then the rest of England earns less and has a lower cost of living than London.

          Nor are they earning the median household disposable income within Greater London (a rough proxy of £30,256 per head of population * 2.4 people in the average household = £72,614). At those wages, that million pound property would be more than 13 times earnings.

          If the most a lender will advance is 4.5x earnings, that median London household can borrow £326,763. Which means they would need to a deposit of nearly 70%, or £700,000 to buy that million pound property.

          That’s a big ask.

          Or they could choose a different path. Get remote working jobs that pay reasonable money not City money, and live somewhere that wins on the lifestyle front with a much lower buy in point. Avail themselves of the geographic arbitrage opportunity, and not worry about the ruinous London housing prices.

          We’re only as trapped as we choose to be.

    • Stormy 19 March 2022

      Hey a fellow Denver reader. Nice house hacking! I started looking for a first home last year (along with everyone else, as it turns out) and couldn’t compete with the +20% no contingency offers.

      Now have a downpayment still sitting in cash, and likely 5-6 years away from trying again. Not sure what to do in the mean time. Probably stuff it back into equities and hope for the best.

      PS: any tips for buying first home after 50? ?

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

        Thanks Stormy. Good luck with your house search.

        PS: any tips for buying first home after 50?

        Maintain realistic expectations and keep an eye on your long term plan.

        I’m not sure about in the USA, but in Australia or the UK once you reach 50 the mortgage duration lenders are willing to offer reduces. Many won’t lend to people beyond retirement age, fearing that when their income falls off the cliff edge from employed to pensioner they won’t be able to meet the repayments. The sad truth is, in an alarming number of cases they aren’t wrong!

        That in turn means higher repayments, lower borrowing amounts, or most likely both.

        But here are the questions: when will you retire, and where do you plan to retire to?

        Unless you were planning to live in your target market for the next 10-20 years, it may not be worth buying where you currently choose to live. Instead, you may be better off attempting to buy where you hope to end up, and renting it out until you wish to live there yourself.

        Only you know what the correct answer will be for your circumstances. But at 50+, you probably no longer need a big family home, and probably will only need to maintain a viable commute for a limited time horizon.

        • Stormy 19 March 2022

          Thanks, that’s exactly what’s on my mind since it will be in the UK. Likely a higher purchase price, higher interest rate, and shorter term (<= 15 years) means high cost to service that loan, so that's the scenario in my spreadsheet. I don't have luxury tastes or requirements, just need a sustainable retirement which the private rental market will not support.

  7. BigPat 21 March 2022

    I’ve struggled with S&S ISA vs cash ISA as someone who has been vaguely considering buying a house for 5 years, but never settled down long enough in an area to actually do it. I ended up going for Vanguard life strategy 20% equity that has felt a nice balance of offering some potential equity gains but also with the large bond portfolio hopefully preventing calamity. The LISA 25% bonus each year also helps to offset concerns about lost money if stock market drops. Good piece on the issue though. I would love there to be a UK average house price market tracker type product that would feel ideal to put money into.

    • {in·deed·a·bly} 21 March 2022 — Post author

      Thanks BigPat.

      The concept of a house market tracker is intriguing. One challenge I can see is that nobody actually lives the national average, property values are all about local markets. At any given time some housing markets are growing off the charts, while others are flatlining, a reflection of the local economic conditions that prospective buyers weigh up before making a purchase to live in or for tenants to rent out.

      This means the needs of somebody seeking to buy on a monopoly board road in central London are vastly different from those of somebody with more modest aspirations in Northern Ireland for example.

      That said, a diversified low cost multi-asset tracker fund would tick many of those boxes for a first time buyer hoping to keep up with the market and possibly receive a favourable tail wind while attempting to accumulate their deposit.

What say you?

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