Good reads from around the Web.
Once I’d finished kicking myself, I allowed myself a wry smile on reading the latest house price survey by UK Value Investor. It brought back a lot of memories.
John entitled his post UK house price forecast: It’s not looking good.
But I was thinking that for me it might have been called A little knowledge is a dangerous thing.
The source of my dark mirth was the following graph. It shows how the average house price moves through bands of apparent over and under-evaluation over time, as defined by a deviation from the longer-term norm of property prices to average earnings:
When I look at that graph, I’m taken through the story of my adult life.
In the mid-1990s, fresh out of University and already with an eye to a bargain, I was urging friends to buy their own home. I can vividly remember reading an article in The Sunday Times showing how the price-to-earnings ratio for London property had hit an all-time low in the wake of the early 1990s house price crash. (Yes kids. Really).
It’s hard even for me to believe now, but the meme back then was that buying was so over, and that Generation X would usher in an era of renting. (Which has eventually happened with the Millenials, but not exactly out of choice.)
As you can see in the graph, I got ‘anchored’ in 1995, as the behavioural economists say, to very low prices. Unfortunate.
I wanted to buy, but for various reasons I didn’t – I’d only had a job for six months and I knew it was the wrong one, the £5,000 or so I’d saved as a student (!) didn’t go far, and I was greedy and wanted to buy in gentrifying Clapham Old Town, not Brixton where I actually lived.
What was the rush? Nobody wanted to buy. A couple of years of frugal living and hard saving and I’d swoop in like Hetty Green.
When I moved out of London for a couple of years to a new job, I urged my new friends in the provinces to buy there, too, as the infamous ripple rumbled beyond the M25.
Incidentally, these friends have finally stopped thanking me for first putting this idea into their heads, either because they have forgotten, they are too-embarrassed by my ongoing property penury, or they’re too busy going on holiday with all the money they save from paying £200 a month for a four-bed house in the best part of town.
Which is fair enough, obviously, but being remembered as the kindly savant did soften the sting a little…
Trees that grow to the sky
Back in London in the early 2000s – and with a combination of nearly 10 years of savings and access at last to sufficient self-employment records to please the bank manager – I put in an offer on a two-bed in 2003.
And then there was a snag with the paperwork. The mortgage agent suggested, in essence, that I make something up.
Truth is I dithered not only for moral reasons. I was now telling my friends that I thought property was becoming truly over-valued in London, and I was risking ten years of savings from a very ordinary basic rate taxpayer level income in the face of a potential crash.
If my London friends who heeded this terrible call still remember it, they are kind in (generally) not mentioning it. Swings and roundabouts, I suppose.
Look at the graph above and you can see my fears. Prices are moving into the orange zone. My gut call was right. But my crystal ball was murky, and history had other ideas.
Remember, we couldn’t know then what would actually happen next.
Here’s what happened next:
This graph – from The Guardian – shows that average London prices are now more than 14 times earnings, according to the property specialist Hometrack.
The unprecedented eight-times peak that had me quailing back in 2003 looks positively pedestrian.
What a palaver. For the record I did look at a few properties in 2010 (partly as a result of helping a friend who didn’t want to view them on her own) and thought prices now looked a tad more sane.
I wondered if it was time to stop the bleeding.
Alas, that mini-crash lasted about six weeks and my firepower had been
smashed to smithereens roughly halved by the financial crash. Which left me feeling guilty as well as keeping me renting.
Some readers have told me over the years to stop complaining, and just move and buy. I am complaining to some extent I suppose, but it’s a sort of rueful self-knowing complaint.
It is what it is, as my younger friends say. But that doesn’t make it “right”. (Substitute rational, fair, sustainable, predictable, a good bet, or whatever other word you like – I’m just using it to cover the waterfront, not to imply a deep moral injustice).
I can buy, even in London, albeit because I’ve basically turned myself into West London’s answer to the early Warren Buffett.
But that doesn’t mean I will, or even should.
Bailed out by the bond bubble and the BOE
I understand anonymous commentators on the Internet are all geniuses. Their property purchases were wise, prescient, and it’s entirely in the proper order of things that their homes now cost 10 times what they paid for them, and that they couldn’t afford a shed at the bottom of their garden if they had to buy today.
That’s nothing – you should see them at the races!
But let’s be honest, if you were told in 2007 that the world was about to face a once in five generations financial crisis, would you honestly have thought London property prices would be trading at more than 14-times earnings some six or seven years later?
I sold most of my bank shares before the worst of the crash hit because I was convinced high debt was part of the problem, although I didn’t in any way understand exactly how in the way we all do now.
It was also part of the reason why I was nervous back in 2003 – I saw ill omens all around, particular with spendthrift friends buying flats via credit cards and parental handouts.
Ho hum. Moral hazard has been on holiday for a decade.
Other people say “of course property prices are very high, bond yields are very low.”
To which I say: Unconvinced. Prices are not at anything like such high levels in the US, which had a bigger crash and for a long-time as low or lower bond yields. Nor the big cities in Germany and Spain where ten-year yields are from time to time negative.
Oh, and anyway I’m not going to condemn myself too harshly for not to have anticipated the property bubble would be bailed out by 5,000-year lows for interest rates.
Brexiteers to the rescue?
Clearly all property markets are local to both time and place, which it took me too long to fully understand. The UK economy – and more particularly London – has been doing very well in a world that’s been doing rather poorly.
The brilliant Brexit may now burst the London property bubble, but then again it may not.
I’ve seen the thing stagger back onto its feet too many times to stomach the confident soundings of a new recruit. I’m more like one of those hardened zombie-fighters that the prettier and younger movie stars find holed-up in the top-floor of a crumbling tower block.
They think the worse is over. I’ve seen it all before.
A little knowledge is a dangerous thing. On the other hand, my experiences (and that housing deposit I never deposited, but instead put into the market) has helped make me the investor I am today. And I’m pretty content with that guy’s record.
Still, I can’t deny it’d be nice to be able to knock a wall down now and then.
Have a great weekend.
From the blogs
Making good use of the things that we find…
- Don’t bother reading this – Jonathan Clements
- Good summary by SCM of last week’s FCA report [Embedded doc] – T.E.B.I.
- Low-vol investing “is not worth the brain damage” for most – Alpha Architect
- What fraction of international smart beta is dumb beta? [Research] – ABWorks
Product of the week: The new 2.2% NS&I savings bond announced by Phillip Hammond in the Autumn Statement is getting short thrift. ThisIsMoney quotes one pundit who says the Chancellor is “papering over the cracks”. The 2.2% three-year fixed rate isn’t the problem – depressingly it’s a table-topper, even though after rising inflation it’s likely to deliver a negative real return. Much worse is that you can only save £3,000 a year into the bonds, which will net you £66! You’ll have to wait until next Spring for this particular dream to come true.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.
Brexit still looking a great idea update
- Britain’s Autumn Statement hints at how painful Brexit is going to be – Economist
- Britons face a “dreadful decade” of wage stagnation, IFS warns – Bloomberg
- Reality check: How much will Brexit cost? – BBC
- Martin Wolf: Brexiters choose to target the messenger [Search result] – FT
- Ex-Prime Ministers warn of Brexit buyer’s remorse – Bloomberg
- Investors turn towards evidence – Morningstar
- Hedge fund vet Steve Cohen is putting money into a passive startup – Bloomberg
- Jack Bogle Q&A: “We’re in the middle of a revolution” – Bloomberg
- Interview with Larry Swedroe about his new factor investing book – ETF.com
A word from a broker
Other stuff worth reading
- Autumn Statement 2016: At-a-glance – ThisIsMoney
- Autumn Statement: What it means for your money [Search result] – FT
- Buy into a pension while tax reliefs last [Search result] – FT
- How to earn £27,000 a year tax-free – ThisIsMoney
- Will banning letting fees push up rents? – Guardian
- One writer’s year of not spending anything is over – Guardian
- How much is enough? – The New York Times
- 33 million millionaires own nearly half the world’s wealth – Business Insider
- The signs that civilization is about to collapse [Excellent podcast] – Bloomberg
Book of the week: Investing Caffeine this week looked back to the fall of the Long-Term Capital Management hedge fund in the late 1990s. If I knew then what I know now, I’d have been a lot more worried than I was. Curious to learn more? The Kindle version of Roger Lowenstein’s classic account – When Genius Failed – is just £5.49 at Amazon.
Like these links? Subscribe to get them every week!