North Star

The walk down the promenade was depressing. Seven out of every ten storefronts were boarded up. Litter playfully danced through the teeming downpour, propelled by miniature whirlwinds. At least the rain helped dilute the puddles of piss and pavement art decorating the badly maintained footpath.

“Welcome to the North” read a faded poster, dangling precariously in an abandoned shop window. The poster featured the image of an iconic sculpture silhouetted by sunset. The shop’s leaky roof causing the colours to run, transforming the modern Angel of the North into a foreboding ancient Viking blood eagle.

Welcome indeed. At least the locals seemed friendly. The homeless, begging from doorways and outside fast-food outlets. The elderly and the disabled, collectively forming a sizeable portion of the local population. A sizeable population in more ways than one, understandable given the tiny fruit and vegetable section of the local supermarket was both grim and expensive, while the greasy chippies and dubious kebab shops on most street corners offered a more affordable, albeit less healthy alternative.

Head down, I questioned my life choices as I trudged through the rain towards where I was staying.

It was located in a new build housing estate, not far from what in more prosperous days gone by may have once been described as the town’s business district. Peeling billboards proudly proclaimed three-bedroom family homes for sale, available to buy via shared ownership schemes, starting at just £125,000.

Car parking spaces located a mile from where I live cost more than that!

After a while, Londoners stop seeing the “London tax” levied on just about everything, the toll of residing in the capital. Escaping the big city bubble every now and again helps regain some perspective of how the rest of the country lives and views the world. Not because they are right necessarily, but because there are lots of them and they vote. Their struggle is real.

Out of curiosity, I had done a little bit of internet research into those advertised properties. Located on one of those infamous new build estates, where the houses were sold on a leasehold rather than freehold title. Each home purchase including a complimentary automatic ratcheting service charge, with increases so punitive they would make a seasoned loanshark blush.

Constructed from lowest cost materials at the height of a property boom. Traditional bricks and mortar replaced by cardboard and duct tape. Creating a perpetual maintenance nightmare for the house proud owners. Repairs they couldn’t afford, given local wages are roughly 20% lower than the national median.

I ran some quick numbers.

To rent such a property would cost roughly £145 per week, or £7,500 a year. Consuming in the region of a quarter of those lower than median wages.

Buying the property would require a deposit, starting at the equivalent of a year’s annual rent. A challenge, yet one that should be achievable for a family who chooses to live within their means.

Assuming they took out a mortgage with a fixed rate honeymoon period at current market interest rates, their repayments might include an interest component of £66 per week, or £3,450 over a year.

At first glance, owning in struggle town represented a clear cash flow win, with mortgage interest costing less than half the equivalent rent. An equation likely to become less true once that honeymoon period ends, as interest rates inevitably climb to ward off inflation.

Of course, at this shallow end of the property market, an interest-only mortgage would not be an option for many. For lenders, the numbers are too small and the risks too large to make the commercial proposition worthwhile.

So the homeowner would probably have a repayment mortgage in some form. The capital repayment component of which increases their outgoings to roughly £125 a week, or £6,600 over the year. Still a cashflow win over renting, though this simplistic comparison ignores the additional ownership costs of service charges, maintenance bills, and buildings insurance.

Some would argue capital repayment components notionally represent savings rather than spending, as each payment increases the homeowner’s net worth by reducing the amount they owe.

Others may argue that the homeowner already enjoys the full benefits of ownership, in that they get to keep any capital gains realised upon the future disposal of the asset. This occurs regardless of whether they repaid capital amounts throughout the term of the loan or simply cleared the mortgage balance in full when the property was sold.

At this point, it becomes a head versus heart debate. A “forever” house owned free and clear may grant the owner a feeling of financial freedom that no passive income stream could hope to match.

Spending the best part of a lifetime gradually chipping away at the mortgage represents the greatest financial achievement many people will make. Instinctively embracing a “slow and steady” approach, striving for housing certainty before their income plummets over the financial cliff that is retirement.

Financial alchemists would argue the homeowner’s money would be better off invested elsewhere.

Asking themselves which asset class is more likely to outperform over the long term? A single-family home in struggle town? Or the multinational megacorps of Silicon Valley and Wall Street?

Whether we think about it in these terms or not, each capital repayment component of a mortgage represents a new investment. Every. Single. Month.

By all means, make those investment decisions to repay the mortgage. But do so consciously, only after understanding the potentially vast opportunity costs involved in doing so.

The next morning, I quickly packed my bag and gratefully departed my lodgings. I wouldn’t miss the blocked toilet. Nor the slowly putrifying body of a dead dog hanging out of the communal garbage bin. There are some wonderful places to visit or live in the North, this simply wasn’t one of them.

A few hours later I emerged from a busy train station, to be greeted by all the noise, bustle, and pollution of the capital. An enterprising homeless guy begged for old phone handsets outside the station entrance. The aroma of a falafel stand wafted down the street, same ingredients as the struggle town equivalent I had walked past the night before, the only real difference was the price.

Endless buildings of new build apartments lined the train lines on my way home. Freshly painted billboards proudly proclaimed “more than half sold”. Just like the properties up North, these were “affordable” housing targeted at first time buyers. Near good locations, yet in every case compromised in some way. Backing onto motorways, train tracks, electricity substations, or water treatment plants. Constructed from the same lowest cost building materials.

Again, the only real difference was the price.

Forget a three-bedroom family home, those were priced in the mid-seven figures. No, an “affordable” home in this context was a one-bedroom shoebox with asking prices 7x the cost of those family homes up North. If only incomes of those wishing to purchase matched those multiples! But alas, they don’t come close.

Those houses in the North offered prospective landlords a gross rental yield in the region of 10%.

By comparison, these apartments offered a gross rental yield of less than 6%. Factor in financing costs, service charges, maintenance, management costs, and prospective landlords would face a breakeven cash flow proposition at best.

Their investment represented an optimistic bet on the future of London. Buying in hope that their property’s price would rise faster than the prevailing market. Delivering real capital gains, that exceed their holding costs.

The approach might still work. It certainly used to back in the olden days.

The closer to home I travelled, the higher the property prices soared. In substance, little different to those abodes in struggle town. Four walls and a roof. Similar sized footprint. Containing the hopes and dreams of their aspirational occupants, combined with their hoard of worldly possessions.

By the time we arrived at my stop, the property prices were over 10x those of the struggle town family homes. Low seven figures. A small fortune when viewed from afar, sparking envy and jealousy. Mere table stakes for those who lived in the capital, residents feeling no closer to rich than those up North.

Which made me stop and think.

Someone from my neighbourhood, who cashed in their chips and relocated to struggle town, would be free in a financial sense.

Financially, it would likely be a one-way trip. Yet potentially a life-changing one, that would make options like early retirement or pursuing a lifestyle vocation immediately accessible options.

The same person choosing to stay put would be consciously consigning themselves to the continued “real life” struggle experienced by those born and bred up in struggle town. Potentially earning higher incomes, which were more than offset by higher housing costs.

Housing locations are an endlessly fascinating trade-off. The right answer evolves throughout our lives.

Living like a student in a group house may appeal for a while, but becomes less desirable for a loved up young couple, and is incompatible with the needs of a family with young children. Things come full circle in our dotage, we just refer to the group houses as aged care homes.

School catchments don’t matter at all, then matter almost to the exclusion of all else, before ceasing to matter altogether.

Healthcare follows a similar arc, barely crossing our minds until we find ourselves stricken by disease or disability, at which point it soon dominates every facet of our lives.

Employment opportunities matter a great deal at the beginning of our careers. We start out full of starry-eyed ambitions. Believing that we are destined for greatness. To occupy the big chair. Make the big decisions. Earn the big bucks.

Before long, reality dawns.

The realisation creeps in that advancement and success are a steep pyramid. A zero-sum game.

Every person who successfully climbs a rung on the career ladder leaves behind dozens of former peers who never will.

Eventually, all career trajectories plateau. Top out. Commence their descent.

Hopes fade. Dreams die. Priorities compete. Obligations, responsibilities, and demands accrue.

Whether we realise it or not at the time, this represents a turning point in our lives.

Some choose, through apathy or conscious decision, to battle on against the inevitable. Keep on grafting. Grinding away their lives pursuing the same salary levels, and the ever so slightly declining purchasing power they provide. Eventually, some will pay off their mortgage, freeing up cash flow, and improving their quality of life as result.

Others choose to seize the moment. Recognise that their race has been run. Hit eject and bailout of the corporate game of thrones in pursuit of happiness, fulfilment, or quality time with their family.

This second group may decide to sell up and move somewhere their money will stretch further. Geographic arbitraging their way towards a life with greater control over their time, granted by lower housing costs. Perhaps somewhere like that struggle town.

Of course, such an option is only available to those who made bank during the early days of their careers, and who managed to retain rather than spend a reasonable proportion of that sum. Decisions compound the same way investments do, only with more transformative and life-changing results.

I grew up somewhere not dissimilar to that struggle town I had visited. With the benefit of hindsight, moving away to seek my fortune was one of the best financial decisions I would ever make. Yet once accomplished, there is a lot to be said for leaving the rats to their race, and returning to a small pond where we can enjoy life as a big fish.

My school friends who stayed continue to live that struggle town existence. No happier or more satisfied with their lot in life than the “everyman”, but certainly financially poorer for it.

Interestingly, the majority of the migrants I have met in London over the years eventually pack their bags and depart for pastures new. Some of the most driven and self-motivated people I have ever met eventually recognised that chasing money in the big city is just a phase, not a final destination.

They subsequently prioritised lifestyle, funded by savings realised via geographic arbitrage supplemented by income earned performing lifestyle jobs.

The happiest of those appeared to accept and embrace the end of their climb up the career ladder. Opting for “retirement” jobs, usually a rung or two below where they had topped out, because the same range of opportunities just don’t exist in struggle town. They opted to retreat back to a level where the work involved more fun and less responsibility.

Carving out pocket empires well within their comfort zones, performing roles they could do with their eyes closed, but which offered the sought after flexibility due to the shallow local talent pool. Working for small local firms, regional universities, or a provider of government services.

It isn’t the only way to play the game of life, but as far as game plans go it has a lot going for it.

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