Tuesday, 12 March 2013

Castles made of sand

    It's happening again. People around me are talking about buying houses. I thought it went away back in 2007 when the Smug Homeowners suddenly found out that instead of Earning Money for Them their prized dwellings had turned into worrying liabilities. Instead of banging on incessantly about their precious house prices or property investments they fell strangely silent, the formerly property-laden Christmas round-robins preferring instead to obsess about the school choices for their super-intelligent offspring.
    Sorry. I guess I can't help turning the knife. I had to suffer a decade of it and I became more than a little annoyed.
    You see, in the decade before the banking crash in 2007 the British housing market grew in a frightening bubble beyond the reach of first-time buyers like me, sustained on a wave of investment buyers capable of paying any prices with their easy credit. The financial industry pulled the ultimate confidence trick of persuading the public that debt was equivalent to wealth, and they just lapped it up.
    The housing boom passed me by for two reasons, I'm very debt-averse so I didn't jump in when I had very little money, and just as I reached the point at which I might have afforded a house along came the dotcom crash which pulverised my industry and gave me some serious career turmoil. Back then I was rather depressed about it, but later in the decade I realised that I was the fortunate one for being debt-free. If I lose my job or the economy goes crazy there'll be nobody chasing me for a quarter million quid I don't have.
    So I'm rather surprised to see people talking about buying houses again. Younger colleagues, to be precise. Not old enough to remember the last time the economy went titsup back at the end of the '80s, none of them had friends who spent the '90s sleeping on their parents sofas paying for homes they no longer owned.
    It all has that bubble feeling about it again. There's an air of "get in while you still can" about it which I find particularly frightening. I even had one of them repeat the hoary old chestnut "Oh, but you mustn't think of it as debt!" to me, to which I just laughed. In my book if the bank can take it back when you owe a single penny on it, you don't own it, the bank does. As I mentioned above, I had friends who learned that one the hard way.
    I think they were a little surprised when I pointed out that I can buy a house if I so choose. I have both the savings for a deposit and the income to keep up the payments, and I'm confident enough in the security of that income to be less debt-averse than I was. But what I couldn't make them understand was why I am not taking that path,why instead my wife and I live in a comfortable but very small rental flat.
    You see, there are three things that keep my cash firmly in my pocket:
    The first is a simple aversion to the asking price. I don't think a house that is priced out of the reach of a first-time-buyer represents good value, if I have to borrow more than I earn in a decade to buy it then I think the bubble is well past its sell-by date. Let some other idiot take the hit.
    The second is demographic. Most British houses are still owned by the so-called "baby-boomers", the generation born just after the war. They're the huge bulge in our population age graph. They bought the houses cheaply in the '60s and '70s and they've hung on to them. Now that generations's just retiring, and in the next decade they'll start to move into old people's homes. So given my first reason, why would I wish to buy something that's overpriced to start with, and is going to have a huge flood of similar properties coming onto the market as the boomers move out, before I'm half way through paying for it?
    And my final reason relates to the economics of the moment. Interest rates are at a historic low, they simply can't go any lower in a meaningful way. There is even talk of negative rates as some kind of stimulus measure. Now you'd think low rates would be good, the best time to borrow, right? Can't say I agree. The problem is, as a first time buyer I'd be expected to go for my maximum possible repayment just to tread water with a mortgage, such is the amount I'd be expected to borrow. And there's the problem with low interest rates, when things go wrong and they're that low there's only one direction they can go, and that's up. As my friends twenty years ago found out, that means monthly payments into the stratosphere, and inevitable repossession. Not a risk I'd like to take right now, what with the economy looking so dodgy and all.
    So my homespun housing economics 101 didn't make an impact on my colleagues. I understand their needs and frustrations only too well, I guess I would have been like them once. But I can't help some shock seeing them blithely signing their young families up for maxed-out interest-only mortgages in the midst of a global economic crisis.
     An Englishman's home may indeed be his castle, but what use is a castle made of sand?


  1. well said!... even if I miraculously became employed anytime soon I wouldn't look at the buying market unless I won the lottery... I know of too many people a generation before me who've been screwed over by the mortgage lenders...

    "what use is a castle made of sand" fantastic line...

    1. Thanks:)

      The most chilling phrase of the last decade: "It'll be different this time..."

  2. Speaking as someone born in 1952, I'm doubtful whether I'll be selling up and retreating into a care home anytime in the next 20 years. I'm afraid that post-war generations are generally the healthiest and best-fed ever seen (thanks to the NHS) and we are likely (if sensible and heedful of medical advice) to remain in a good state much longer than our parents. For one thing, we don't automatically go into pre-death mode on retirement!

    So nobody should bank on lots of Baby Boomers flooding the market with their houses as soon as might be hoped.

    Presumably the concept of council-controlled rented housing will revive, with the building of new, very modern, very well insulated flats let at affordable rates. And eventually most people will be renting rather than owning. And the notion of one's house as an investment, rather than as a home for the time being, will recede somewhat.


  3. I agree with Lucy on this one for I too am of the baby boomer age having been born in 1945. My present house (and my last) was purchased with a mortgage (which incidentally expires this June/July) finally leaving us with no monthly payments to make. The house will be ours and it will be a measure of some financial security for our two children when they inherit. Whereas those who are renting will need to continue forking out cash those who own their homes do not once they've finished with the mortgage. I have no plans to downsize or move out to pasture waiting for God and there is no need to if we can afford to stay here. Yes, because our house is very large the upkeep and running costs are high but as long as we can manage we we stay put. Many of the rooms in our house are not used now that the family have dispersed or have died (we had eleven of us here at one time) and E and I are the only ones left. The house is owned by ourselves. Of course we still have the option of selling and moving on or renting some of the rooms if we wish (not likely).

    Shirley Anne x

  4. Never forget that the boomer generation was also the last for which smoking was the norm. You two are both in good nick, but many of your generation do not have such good foundations to build on. As the boomers reach their 70s of course there will be many healthy and long-lived among them. But such are their numbers that inevitably those who enter an earlier decline will be significantly more numerous than those in other generations.

    I didn't arrive at this conclusion myself. A friend with whom I share a passion for motorcycling is a financial statistical analyst at a London investment bank. A crystal ball gazer, in other words. He earns indecent amounts of money, yet his investments do not include property because he considers it a rather poor long-term investment for this reason.

    Anyway, you both have no need for worry, as boomers you have the houses you need for as long as you're going to need them. Any demographic-driven readjustment will fortunately not be an issue for you.

  5. Think of it this way: it's a sign that folk are *very* optimistic! :-) Most people don't plan a major purchase, like a house, without having a lot of high expectations for the future. If they thought the economy was going to stagnate, or keep slumping, they'd hoard the money. But if they're investing in real estate? Well, that's a positive step for the economy. (Despite George Osbourne's best efforts to keep the British economy in a Great Depression like state...)

    The housing market over here is improving; prices are rising in some areas - notably the southwest and in and around Austin, Texas - and the rest of the country is experiencing a leveling out, with small price increases and more demand. We're not at the 6-month supply limit just yet, but it's getting there.

    Personally, I've always preferred owning to renting. I've done both, and just prefer owning! Of course, even with the mortgage interest tax deduction (we can deduct the mortgage interest from our Federal income tax), I still prefer to buy a house outright. (Like you, I just don't like owing money!) That way the only people who can kick you out are the local government. And they're (allegedly) not as cavalier or careless as the mortgage providers.

  6. Don't forget, it's much harder to be evicted from your own (or as you rightly say, your banks) house than a rental - as too many of my friends and family have found out. Like living in the house? Tough! Rent has doubled, we are selling the house and you have 3 months to find somewhere else to live etc etc.

    In a rental you are reliant on the landlord to keep the house in good order - fine if you have a good landlord, crap otherwise. I've known more crap landlords than good ones.

    On top of this we bought for a couple of reasons. We didn't want to pay double the mortgage on a rental house, or live in a crappy area for the same amount.

    We also didn't like the idea of paying money to someone else for the rest of our lives. In 22 years our mortgage will be paid and we will not be looking at an amount of cash disappear from our account each month.

    What we are not looking for is a fast profit. We've been in the house for 7 years now and are looking at some extensions (dormer windows in the attic to turn it from wasted space into two extra rooms and a utility room).

    As for the ridiculous mortgages. That's up to the individual to use their heads (yes I know, can you really rely on that?). We looked at our finances (when we were both in less than brilliant jobs) and decided what we could comfortably pay each month, what mortgage that would give us and what houses we could but for that amount. Yes, both the mortgage advisor and estate agents told us we could borrow double the amount and buy a semi detached villa with a largish (for Holland) garden. And we would be living month to month and hoping that when the fixed interest period came up that it would not be too high, and counting on the government not to mess with the tax relief (as I know a lot of people are). Should they remove it then it will be a shame, but it will not affect us.

    That way we can sleep at night, and haver our own home ;)


  7. I should point out, I'm not advocating not owning a home, instead I'm suggesting that now is a downright crazy time to buy one. I think there will be an inevitable readjustment before too long at which time I'll no doubt find myself one. Meanwhile I won't face the problems of the foolhardy current purchasers.

    Renting makes sense for us at the moment. I don't intend to rent forever. But in the time we've rented this place we've spent less than the negative equity we'd be facing had we bought back when we started renting.

    Sadly buying outright is only the preserve of millionaires in today's UK.

    1. I'll be honest and say negative equity does not bother me so much. As I said we bought as a house to live in for a long time, and not to get rid of quickly, and tried to get a house where we knew we could cope with the repayments easily. If the value drops in the short term it is not a problem - we are not planning on selling anyway.

      I do know people that were ruined by it though at the end of the 90's, buying at the very top of the bubble, paying far more a month than they could afford and then the bottom dropped out of the market. They were left on the breadline with a house worth 50% of the mortgage on it - and so in the negative equity trap. But that is why we stayed well within our comfort zones when buying the house. Even if it meant not buying in the town we wanted as the house prices were crazy there.


  8. I should have said - twenty years ago my friends found out just how easily a bank can boot you out of a mortgaged house. Very easily as it happens.

    Renters may have less security. But by the same token so do landlords. It's very easy for a tennent to make huge problems for a landlord, and it's a foolish landlord who ignores that.

    That said,we picked our landlord very carefully. No buy-to-let parasites for us, we live in former workers housing owned by a local heavy engineering company who have a deserved reputation as a good landlord and a large number of settled tennants.