How I won the housing market without trying

http://www.theguardian.com/society/2015/feb/05/how-i-won-the-housing-market-without-really-trying

by sasvari • 11 years ago

69 114 11 years ago

Be nice to have got into the market early, many people over here in Australia get the benefit of negative gearing too as they accumulate more houses.

I'd particularly be worried as a young person in the States now, a hefty mortgage on top of some of the student loans I've seen look like it'd spell an entire lifetime of loan repayments.

nodata• 11 years ago

I don't get it: she sold up and made a profit, but unless she downsized, the profit is gone on buying a new place.

joosters• 11 years ago

The article does say that she downsized, with about £200k difference in price. There's the profit!

henrik_w• 11 years ago

Yes. Usually when you sell one house, you buy another, so it is a bit of a zero-sum game. However, what does matter is when you entered the market. Entering the housing market today is relatively speaking much more expensive than it was 20 years ago.

makomk• 11 years ago

If you get lucky and don't particularly care where you live, you don't necessarily have to downsize. London house prices are a lot higher than the rest of the country and have gone up a lot more. You could get a decent-sized house with a garden in most of the UK for what she sold her flat for.

UK-AL• 11 years ago

You could buy a McMansion in most of the UK for that price.

jeffwass• 11 years ago

Or you upgrade to a bigger house, and roll the profits into a bigger down payment on the next property, keeping a similar sized mortgage.

My friend did this, sold his old place and bought a bigger nicer house, keeping his monthly mortgage payment roughly the same, which now is well below market rent.

onion2k• 11 years ago

Except as all equivalent property prices have also gone up, and consequently the price differential between a flat and a house has probably led to a bigger gap in the prices than than the profit than the flat in 1995 and 2015. Eg

£32,000 flat in 1995 -> £660,000 flat in 2015 is an increase of 2062%, or £628,000.

£100,000 house in 1995 increasing at the same rate of 2062% now costs £2,062,000, up by £1,962,000.

To move from the flat to the house you now need to find that additional £1,962,000.

Obviously not all properties increase at the same rate, and presumably the author of the article got a quite lucky with her 2062% increase. But even if the house only increased at half the rate of her flat it still costs £1,000,000 now, so she's £300,000 short.

Price increases only benefit you if the lower end moves up faster than the higher end (which is very rare) or if you're cashing out.

frobozz2• 11 years ago

It isn't so much about the profit from sale, but about being able to buy in the first place. 10 years after graduation, she bought a two-bed flat in Herne Hill. Such a place wouldn't leave much change from £600K today.

For context. Assuming a 3-year course and no gap year, that would make her 31 when she bought.

Were she in the same position today, she'd need to have saved up at least £60K for a deposit (90% LTV) and have a salary of £135K (4x is a common salary multiplier). Given that that's more than a top decile _couple_ in London currently earns, that's not likely. The average salary today for her job at the time, is less than £24K, less than a fifth of what she would need.

Given the high cost of private rent, and the fact that social housing is only available for existing tenants and people who _really_ need it, saving up that much in only 9 years is difficult.

Meanwhile, house prices continue to rise faster than incomes, the longer you wait, hoping for a crash, the less likely it looks that you'll be able to afford a place even after the crash happens.

Even as a direct response to your point, moving out of London makes your money go much further. With that money, you could get a pretty nice house even as close to London as Reading, Maidenhead or even the outer London Boroughs. Not to mention what you could do with the money if you moved away from the south east entirely. At an estimated 61 years old, she's in a position to think about retiring soon, and considering she's not from London, she might well be considering moving away when she no longer needs to be here for work.

http://www.zoopla.co.uk/for-sale/property/london/dulwich-roa...

http://www.theguardian.com/money/2014/mar/25/uk-incomes-how-...

http://www.payscale.com/research/UK/Job=Communications_Offic...

awjr4• 11 years ago

In the UK it's normal practice to get in a chain. You sell yours, line up the one you want to buy, and all 14 people in the chain complete on the same day. Not sure you should be selling your house, then deciding to look.

You have to ask yourself what changed in the UK mortgage market to create this increase in housing value. It comes down to a bank regulation change the government put in place in 1996. Banks were able to offer buy-to-let mortgages.

This has fundamentally distorted the housing market in the UK.

In London you also have another issue. Apparently 40% of new build apartments are bought and never lived in. They are used as an investment to hold money 'safely' primarily by foreign buyers.

[EDIT] Citation for "buy to leave" http://www.theguardian.com/business/2014/dec/04/property-inv... http://www.theguardian.com/commentisfree/2014/dec/08/islingt...

So you have a situation where the Banks leant like crazy inflating the housing market, the crash happened, the banks hardened their mortgage lending criteria, which forced most people into renting, enabling landlords to maximise returns and invest further in rental properties using buy to let mortgages that use rental income as part of the payment calculation.

It's one hell of a vicious circle.

From my point of view I have benefited, but I honestly cannot see my 11 year old daughter ever owning her own property.

CmonDev• 11 years ago

I thought a major reason was Thatcher letting people who should not be owning a house buy one at a cut price?

matthewmacleod3• 11 years ago

No - 'right to buy' is not related to the UK's housing crisis, aside from the fact it depleted social housing stock (which is a separate issue that should not have been allowed to happen).

Offering cut-price sales of social property to council tenants is an amazingly powerful tool for giving people ownership over their communities.

arethuza• 11 years ago

"who should not be owning a house"

I think that's a bit harsh - my wife's parents bought their house under the Thatcher Right to Buy scheme and they were both hard working and financially prudent - they could have purchased a house but it wasn't what skilled working class people did in Glasgow so they didn't do it for cultural, not financial, reasons.

People used to joke that you could tell council houses where the owners had purchased because they had a new front door - and that is true - people look after property a lot more when it's there and whole neighborhoods have been improved that way.

What I do think was wrong with the Right to Buy Scheme was that it didn't spend the money raised on building new social housing.

slap2• 11 years ago

"Apparently 40% of new build apartments are bought and never lived in" : this is totally incorrect

blakef• 11 years ago

Can anyone provide a more accurate figure?

mwj2• 11 years ago

Errr... have you been following the Battersea Power Station development at all?

NotableAlamode8• 11 years ago

I seriously doubt that 40% figure. Why would "foreign buyers" who by flats as investments not take home the (very substantial) London rents? It would be financially imprudent.

I suspect that this is really a form of xenophobia, used, among other things, to sensationalise newspaper articles.

suvelx• 11 years ago

Use diminishes value.

Having tenants requires work, adds cost, and might just not be worth your time.

You might just want a house for a weekend, and not want plebs messing your shit up.

And it probably has some degree of truth, You can stand outside 'new' buildings for a week and never see lights on in some windows.

awjr4• 11 years ago

http://www.theguardian.com/business/2014/dec/04/property-inv... http://www.theguardian.com/commentisfree/2014/dec/08/islingt...

It's called "buy-to-leave" and no it's not xenophobia, it's a symptom of a housing bubble very much centred on London.

teh_klev• 11 years ago

Because it's probably less hassle to sit on the property while it increases in value. Seriously, this is becoming a major problem in London, especially from overseas buyers.

There was an article posted on HN a few months back (which I can't locate right now) which explained this problem.

matthewmacleod3• 11 years ago

The rental income from properties is not worth the hassle. It turns a relatively liquid asset into a much more illiquid one – tenancy rights in the UK are quite strong.

If you want to park your money in property, the worst thing you could do is hand control of that money to a group of people with legal right to keep if for certain periods.

lmm• 11 years ago

I seriously doubt that 40% figure. Why would "foreign buyers" who by flats as investments not take home the (very substantial) London rents? It would be financially imprudent.

Would they be? What's a realistic amount of rent to charge on a GBP 5,000,000 flat? How many people can afford that and are looking to rent?

(Also I think many appreciate having their London flat available for the few days a year they're in town)

DanBC• 11 years ago

They've already shown financial imprudence by buying property at over the market rates.

AmirS22• 11 years ago

Not sure you should be selling your house, then deciding to look.

It's buying a house before you've sold yours that's a problem, not this way around (think cashflow), especially if you don't mind putting your furniture in storage and renting for a few weeks in between.

vacri2• 11 years ago

A couple of things are worth mentioning. Firstly, everything but housing is much cheaper now than in the 80s/90s. People will spend their money somewhere. The ability to do your own repairs is also much greater, as the huge (and cheap!) hardware stores have sprung up and the DIY culture has become stronger.

Secondly, I don't know about the UK, but here in Australia, home loans in the 80s had interest rates of almost 20%, as opposed to 5-6% today. It had calmed a little in the 90s though. The cost in dollar terms was much cheaper, sure, but it was still difficult to service at the time. Buying a house was still monumentally stressful. I know a few boomers who were unable to maintain their mortgages in that time.

Just because the sticker price was significantly smaller doesn't mean that it was all that much easier.

Edit: it's also worth mentioning that the median wage in the UK has increased about 50% from 1990 to 2010 (~16k to ~24k) and the average wage more than that. Housing is still depressingly expensive, but the numbers aren't quite so wildly different as shown.

nl6• 11 years ago

here in Australia, home loans in the 80s had interest rates of almost 20%, as opposed to 5-6% today.

That's a pretty big exaggeration. Rates peaked at 17% in 1989, but were below 15% for most of the 80's[1].

[1] http://www.loansense.com.au/historical-rates.html

tonylemesmer• 11 years ago

Individual loan products from lenders would have been slightly different to rate shown in the graph. So "almost 20%" isn't that far off.

junto• 11 years ago

What is interesting, is that the policy makers have a financial interest in ensuring that the housing market does not crash. Therefore every time it should have crashed big time (2001, 2008), the BoE has propped it up by making sure that borrowing remained dirt cheap and the government made sure that the market stayed liquid (raising stamp duty levels for example).

Every time they do this, they just exacerbate the problem long term, which is quite simply, that the market needs a correction, and the longer they put it off, the more painful the correction is going to be (like it was early 1990's in the UK but worse).

I for one say let it burn.

brianmcc4• 11 years ago

In many places in the UK, it did crash big time. Plenty of people I know even today are in homes well below their 2007 levels or have sold for painful losses. London is unusual in that many properties sell for cash, to investors, and in fact the BoE and mortgage lenders have surprisingly little influence in terms of rate changes. Not sure letting anything "burn" particularly helps anybody.

Edit: I suspect "let it burn" reflects a certain frustration, you have my sympathy if you or your family/friends are finding the situation a barrier. Facts and figures can mask the very personal cost of being unable to achieve fundamental goals in life such putting down roots for one's family.

awjr4• 11 years ago

My mother just recently bought a studio flat in Wales for 31k. Prices are dropping around the country. London prices are forcing people away from living in London. Businesses are moving away. (If you are a young developer, I'd suggest moving to Bristol.)

matthewmacleod3• 11 years ago

I don't think you achieve much by 'letting it burn,' as it were. All you do is force a large number of people into a bad financial situation – that's not good for anybody.

The market needs correction, but it needs to be well-managed. That basically means long-term house price stagnation and investment in social housing to remove the incentives for buy-to-let landlords and multiple property owners.

justincormack2• 11 years ago

Property is a zero sum game. People without houses lose the equivalent in future spending as homeowners gain. So propping up a market is directly taking money from the young and increasingly old non homeowners. So not doing anything is putting a large number of people in a bad situation.

lentil_soup2• 11 years ago

On the other hand, the rising prices are leaving a lot of people in bad a financial situation already as they can't afford a house/rent. So "letting it burn" would benefit some people.

Also, I would imagine people in this second group struggle more than the ones that already have a house or are using it as an investment. I would expect a government to enact policies that benefit them the most.

prostoalex4• 11 years ago

What is interesting, is that the policy makers have a financial interest in ensuring that the housing market does not crash.

Exactly. Moreover, the housing value is tied into things such as total wealth (which is why after the 2008 crash the wealth of middle-income and low-income Americans crashed, too much of it was tied up into housing equity), which then ties into economic outlook and consumer spending, which then ties into lending and all things finances.

Presidents and parliament members do get voted out when there's a severe contraction in consumer spending and generally depressive feelings about economic outlook.

buro9• 11 years ago

I saw a startup tweeting yesterday about a shared investment.

The gist is that instead of investing in stocks and shares, you put your money into property and a shared structure gives you some % of the property in question. The startup actually owns the property, and there is some legal allocation of your portion, and they offer the means to exit your share of a property without the property itself needing to be sold... your share just gets sold to the next investor.

As a startup I can see this working, as an investor I could see this working, as a resident in London I'm frankly appalled.

prostoalex4• 11 years ago

This has been around, if you buy the house under LLC, you can divvy up the equity whichever way you want it.

How's liquidity provided when there's no "next investor"?

stana2• 11 years ago

Thanks to banking deregulation housing has become an investment commodity. In major cities in Australia at the moment half the purchases are for investment rather than owner-occupier. Government incentives like first-home buyer grants (if you can't save for a deposit) have only lifted the prices and helped vendors. Another one is negative-gearing introduced a couple of decades ago allowing tax deduction for investment properties making a loss (after rent), pushing prices higher. Only a few years ago the rules were changed around Australian pension funds (superannuation) allowing leverage. Property purchases from these funds sky-rocketed. All of this while Foreign Investment Review Board (who should be in charge of making sure foreign investors only buy new properties) has not had a single prosecution in last 8 years making you wonder if the rules are being followed at all. It is hard not to make a connection between constantly rising house prices and baby boomer generation dominating the government. It has been recently estimated Australian politicians hold a $300m property portfolio. Talk about conflict of interest..

yummyfajitas3• 11 years ago

Why would housing not be an investment commodity if banks were more strongly regulated? What specific regulation do you propose that would prevent housing investments?

easytiger• 11 years ago

Communal ownership of all property comrade!

jussij3• 11 years ago

In Australia we have negative gearing. In layman's terms it means you can offset property expenses against your real income.

So if you have a big income with a corresponding big tax burden, you can reduce you extra income to purchase a property and by using the expenses of that investment, reduce you net income and hence reduce you net tax burden.

So rather than paying the tax man, you end up paying the bank, which for you the rich investor, is not bad since the value there is a chance that second, third, forth property that you are now gearing will appreciate in value.

So while the tax receipts of the country go down, your paper wealth goes up, that is until the next GFC.

So the end result is the rich continue to reduce their tax burden, reducing the tax income of the country, hence passing the tax burden onto the middle and lower classes and in the process the rising house prices encourage those same rich to invest in yet another property as their paper wealth continues to climb.

Any one can see that is not good for the country, not good for the community and also not sustainable.

It's easy to create a bubble but at some time the buble has to burst.

pjc507• 11 years ago

He mentioned a list of items, such as

Foreign Investment Review Board (who should be in charge of making sure foreign investors only buy new properties)

which is apparently a rule that's not being enforced. Lots of the western world is seeing housing bid upwards by capital flight from China.

stana2• 11 years ago

Not prevent it. But around half the purchases in housing being for investment seems a bit distorted. As far as regulation I would start by encouraging lending to productive parts of the economy (business, innovation, startup, infrastructure, etc.) and limit lending for rent-seeking activities like market speculation.

Omniusaspirer2• 11 years ago

It's basically inevitable though that in demand property will rise in price, especially with regulation constraining building height/form factor. Home cost in urban areas is much more about location than it's about any real cost to building the residence. Lots of people buy large houses for very little a few miles out of town where land is abundant and demand is more reasonable.

I guess I'm just having trouble really feeling sorry for anyone who decides that living within a select few square miles is worth paying an obscene percentage of their income towards that pursuit. It's a housing market and prices will rise to meet demand until buyers finally split off to other nearby locales.

As to your last line; There's a reason that most people don't want to admit that 2008 was the housing bubble popping and instead insist that homes are "finally returning to their true value".

lars512• 11 years ago

Well, picking a shorter commute is a reasonable choice to make. Longer commutes don't take time from work, they take time from family, and are associated with higher divorce rates, at least amongst Swedes.

In a city like Melbourne, where I live, there's a lot of development which could still be done to reach a reasonable medium-density of 3-4 story apartment buildings in the suburbs immediately circling the CBD. It is being done, but not to such an extent that housing prices will stop rising. I really wonder what this city will look like in another 20 years, as people are pushed further and further out but the work is still centralised.

mwj2• 11 years ago

"There's a reason that most people don't want to admit that 2008 was the housing bubble popping and instead insist that homes are "finally returning to their true value"."

It may have burst in the US, but certainly nowhere else

Jacqued• 11 years ago

It is somewhat inevitable, but the problem we see here, I believe, is about the magnitude of this rise. I don't believe housing should be a _completely_ free market : investors should be regulated out of the tense areas (except of course for new developments).

Investment in older buildings in tense areas, combined with wealthy buyers who neither live in nor rent their property, are pushing prices way beyond acceptable ranges. I don't know about London, but in Paris for instance, 20 to 30% of the flats in the center districts are empty.

When young professionals and less fortunate people are struggling to find housing and putting more than 40% of their income into the rent, I believe those 30% of empty flats are unacceptable and the owners should be taxed out of them.

There are plenty of legitimate vehicles for investment, but already-built real estate is definitely not one of them. Such investment is not productive for the economy as a whole and is not much more than generational ransoming.

collyw6• 11 years ago

I guess I'm just having trouble really feeling sorry for anyone who decides that living within a select few square miles is worth paying an obscene percentage of their income towards that pursuit.

There have been studies showing a negative correlation between long commute times and happiness.

I don't have a family, so I am happy to pay for a relatively small apartment in the city centre. If I lived in the suburbs I would get a lot more house for my money, but then I would have to spend and extra couple of hours every day commuting.

nl6• 11 years ago

I think blaming banking deregulation for making housing an investment is a pretty difficult case to make.

Negative gearing, and the flight to safety by overseas investor do have significant impact though.

I suspect many people who think that governments should act to try to cut prices miss the fact how hugely unpopular this would be with the majority of the population.

Many (most?) people have the majority of their savings tied up in a family house and rely on rising prices as retirement savings. That's worked well for the past 60 years or so, and there is no real structural reason why it needs to stop (in Australia anyway).

Ntrails• 11 years ago

As long as those same people don't then complain that retirement forces them to leverage against their house to pay for it. But all of them do, because they feel it's their right to retain ownership to pass on through inheritance which of course only worsens the problems of property access.

collyw6• 11 years ago

Its basically transferring wealth for those who don't own to those who do.

My parents house has quadruple in price over the last 20 years, (while wages have gone up maybe 50%). Where does that money come from? The younger generation that have to buy it from them when they sell up of course.

duckingtest3• 11 years ago

Real estate is so expensive around the world now because of unfair tax policies. True wealth creation is taxed mercilessly via a multitude of income taxes, while gains from real estate are often not taxed at all, even though they're completely unproductive. A person holding a land in the city for 25 years didn't make anything new, their profit is a direct zero-sum transfer from someone else. How is that fair?

The net result is an enormous redistribution from productive young people to (mainly) older owners and inefficient land use, a growth-killing policy.

The solution is simple. Abolish all personal income taxes (or at least reduce their levels) and replace them with land value taxes (not property), something like 30% of value annually. Unproductive use of land would disappear. Retiring people with homes close to jobs would move out fast somewhere else, as short commute times have no value to them. Uneconomical building limits would disappear (more efficient use of land - multilevel housing - would have much smaller land tax per living surface area) which would reduce transport costs and time wasted. It's easy to imagine many more positive effects.

Sadly that's never going to happen.

edit: After some thought, never is too strong. If aging gets cured, something like that will be a certainty, because the alternative is the world in which - more numerous - generations after the invention don't own almost anything, which won't work for long.

doc_holliday• 11 years ago

Exactly, capital over the past couple of decades has been unfairly undertaxed vs labour which has been overtaxed to some degrees in places.

If we don't alter this course we, I fear will end up at early 1900s distribution of ownership with a crippling economy because actual growth driven by labour will significantly decrease.

nextw33k• 11 years ago

I am fully with you on a capital tax. It would ensure a system of constant high utilisation.

Where it gets shouted down is from old people that have lived in their homes for 50 years and seen their property prices rise to make them millionaires on paper but with no real income. They claim its unfair to force someone from their home.

Having studied Alzheimer's disease, it's easier on the mind to live in one place for the majority of your life. Being forced to move later in life can be traumatic.

Once you start taxing capitol you'll end up with no more overpriced valuations, conservative banking will be back in vogue.

ArkyBeagle• 11 years ago

I suspect that "productive use" of capital has simply worn away. What's left is buy and hold of property.

Henry George is credited with land rents taxation as a theory. He built on Ricardo's work to posit a complete theory of taxation based purely on land rents.

prostoalex4• 11 years ago

Extrapolating the data from the US http://taxes.about.com/od/statetaxes/a/property-taxes-best-a... the states with highest property taxes (New Jersey, New Hampshire) don't seem to be the economic powerhouses compared to the states with ultra-low property rates as the theory would imply. (The rates there are on "property value", so the rate for land value would be higher than indicated.)

A person holding a land in the city for 25 years didn't make anything new, their profit is a direct zero-sum transfer from someone else.

For one, he took the opportunity risk of locking his liquid capital into a piece of land, which only accumulates property taxes, as opposed to owning a bond or a stock that pays dividend or interest. When you calculate the IRR, land doesn't necessarily come out ahead of S&P 500 over longer periods of time.

For two, he took on the appreciation risk - the land is not guaranteed to go up in value all the time.

duckingtest3• 11 years ago

the states with highest property taxes (New Jersey, New Hampshire) don't seem to be the economic powerhouses compared to the states with ultra-low property rates as the theory would imply

These are property taxes, not land taxes, unless the article is lumping them. A property tax doesn't provide incentives for more efficient use of land, on the contrary actually.

Even if they were land taxes, they would be way too small for a meaningful difference. Also the biggest effect would come from replacing income tax with land tax, as the most productive people would gain the most, and presumably invest the gain in whatever productive thing they're doing.

For one, he took the opportunity risk of locking his liquid capital into a piece of land
For two, he took on the appreciation risk

There's nothing valuable in risk. Your argument works even better for buying a piece of a rock for a million dollars and expecting profits, as the opportunity risk and appreciation risk are way higher than buying a piece of land.

dingaling• 11 years ago

A person holding a land in the city for 25 years didn't make anything new

Of course they did. When they took out their mortgage, none of that 'money' existed. They had to participate in the creation of wealth in order to pay back mortgage + interest.

I've finally paid-off my mortgage. If someone has a more 'productive' use for my land and building, they are welcome to make me a financial offer.

How I won the housing market without trying

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