[All figures are in Pound Sterling, GBP – figures may differ elsewhere]
A standard, comfortable family home costs around £400,000. There is cheaper to be found in the UK, but how comfortable, and in what kind of suburb? A 400k buys a standard home that can comfortably accommodate a family unit, in a safe and pleasant area.
Though you might argue that living in a house is a necessity, so youll simply have to make do with what you can afford, I beg to differ. From experience, I know that owning something you dont really want and living somewhere you dont really want to be is never a worthwhile investment in the long run. It will put a dent in your self-esteem which will inevitably negatively affect all other aspects of your life. Being on the outside wanting in is always better being on the inside wanting out.
The current mortgage rate is around 3.9%. Assuming a fixed rate over 25 years (which is impossible, but lets assume), then a 10% deposit on a 400k home would make a monthly mortgage payment £1,881. That would need to be paid every month, for 25 years, assuming a static interest rate of 3.9%.
An above average salary in the UK would be £40,000 per year. After tax of 20%, a 40k job pays £2,666 per month. Minus a £1,881 mortgage payment, that leaves £785 for food, utilities, and other expenses.
So after a mortgage payment and other obligatory outgoings, there is nothing left to save, and nothing left for children. Even a 60k salary assuming the same tax rate would leave £2,119 for food, utilities and other expenses. Again, good if you like to live like a student and have no kids.
Now, this is my personal opinion. But if youre single and renting a place for more than £800, youre over-paying. No matter what your salary is, to pay more than £800 in the UK for a roof over your head is excessive. Why this figure? Its based on simple observation of what you get for £800 (or less), form living in the most expensive part of the UK – People want to be comfortable. They want comfort NOW. I dont. I know something. The single biggest marker of success is the ability to delay comfort. I scoff at comfort, because I know how comfort sabotages the habits that lead to success. This all applies to home ownership.London. £800 is adequate for any single persons needs. Ive found that more than £800 buys unneeded creature comforts and features that are void if the accommodation is temporary. If you own a home, those features mean something. If you are a transient renter, who cares?
So, in order to for a mortgage payment to be priced competitively, it should be around £800 a month. From a 40k salary, that leaves £1,866 for bills, food and other expenses, which is more compelling than £785 from a £1,881 monthly mortgage payment.
So to pay only £800 per month, you would need to put down a 62% deposit on a 400k home. That is £247,000.
I have another rule. With RARE exceptions, I consider an investment SAFE if I only risk 20% of my capital. Now, RISK is highly personal. Risk is never absolute. It depends on ones own appetite, situation, inherent ability to hedge, and ones own personal perspective. Example: when I first invested in Gold in 2008, I was laughed at by everyone – friends, family, even the coin dealer who sold me the coins! I invested what little money I had after graduating, which at the time was barely £2,500. From my perspective, I was going ALL IN. That was 10 years ago. I had nothing to lose. Today, the ramifications of going ALL IN are more complex and would have extremely detrimental and long-lasting, life-changing consequences, if that capital was lost or locked-up. If youre fresh out of university, go ALL IN. But from my personal perspective, 20% is what Im prepared to lose on any given investment.
With all that said, with a 62% deposit on a £400,000 home, that would require £1,235,000 in equity for me to risk 20%.
So in order to purchase a standard home, I would need a salary of £40,000 per year, to live extremely frugally (like a student) for the next 25 years (for me, that would be almost up to my 60s), have no children, and have interest rates stay flat for 25 years, at the lowest interest rate environment in Human history. Or, I would need £1,235,000 in cold hard cash. Which I do not have (sorry)!
A MORE LIKELY SCENARIO:
1. Rates will begin to rise uncontrollably after central banks lose control and the free market stops buying government bonds.
2. The crash in the bond market will cause a liquidity crisis that will prevent banks from lending.
3. The Pound will lose 30% of its purchasing power.
4. In response to both the lack of bid in government bonds and a falling currency, the UK government will increase property taxes. Theyre the government; they have the guns, so they can move the goal posts wherever they like.
Instead of getting a mortgage, working for a bank (if you have a mortgage you work for a bank, nobody else), living like a student well into my 50s, having no kids because I cant afford to, being immobile, having negative exposure to interest rate risk, currency risk, government risk and tax risk, I can do the following:
1. I can rent small single apartments in good parts of town. I can make sure that where I live is as practical and comfortable as possible, while keeping my rental payments as low as possible.
2. Even better__I can have even more freedom by renting through AirBnB, or staying in hotels. I love hotel living__you can walk away at any time, you normally have facilities like a gym or swimming pool within the same building, and theres a social aspect that you cant get from solo living.
3. Or my personal favorite volunteer in a hotel/hostel or other place, in exchange for free accommodation. You may only work for 2 hours a day, giving you freedom of schedule. Outside of your volunteer hours, you can work on your business, do other salaried jobs, or ponder what you want to do without the worry of rent.
4. I can short government bonds, or long rates, taking advantage of (what will be) the greatest mean reversion in Human history.
5. I can short the Pound versus other rising currencies, like the USD.
6. I can find creative ways of shorting an excessively leveraged housing market, such is the case in London.
7. I can build business infrastructure that is streamlined and doesnt require office space, minimal contact with clients and suppliers, and can be done with nothing more than an internet connection and a laptop.
8. Since my rent is low, or zero, I have more disposable income to put into appreciating assets and investments.
This way, I can offset, avoid, or even take advantage of any rates risk, currency risk, government risk, or banking risk. I get to invest and save, whilst having freedom of place, and freedom of schedule.
The property that I would eventually own would be a self-build on land that I own outright. No debt, no mortgage, no working for a bank. If the land and house build cost would be around 100k, my equity requirement would only be 500k__possibly less, since I would have no monthly outgoings associated with a mortgage.
As you can tell, I dont succumb to the blindness of group think, that says you need to buy a home because its a thing you do, because its always a good investment, because its safe. Im tenacious and independent; I invest in things even if it means getting laughed at.
I also prize freedom above all else. Now – freedom can be idealized. You can go work on a farm and join a commune. No money, because you have no need for money. Then you break your leg. Are you free? Or are you just avoiding EARNING freedom. I believe freedom is the most important asset you can own. But freedom isnt inherent, it has to be earned and re-earned. Having a big backup of funds in case of emergencies is freedom. Piling paycheck after paycheck into an asset you dont plan on selling, which is exposed to influences outside of your control, is not freedom. Freedom means being nimble, in all senses: location, mentally, and financially.
Another essential part of my philosophy is Delayed Gratification and Stoicism. People want to be comfortable. They want comfort NOW. I dont. I know something. The single biggest marker of success is the ability to delay comfort. I scoff at comfort, because I know how comfort sabotages the habits that lead to success. This all applies to home ownership. You want the home NOW. I can live like a student well into my 30s if it means living like a king in my 50s. I shun comfort at every turn. I have cold showers. I go for a 2 mile run every morning. I meditate for 30 minutes a day. I lift more than twice my body weight in the gym. I risk 20% of my equity. I only eat one meal a day, and typically starve myself for 2123 hours. I go out to the club, ALONE, SOBER, and choose to socialize. I put off pleasure and temptations every day, and I love seeing myself wrestle with self-control. Thats uncomfortable. I cant remember a day that was comfortable, or even satisfactory. Nor do I want to. Freedom and comfort are mutually exclusive.
An essential element of freedom is self-esteem, because self-esteem is built from self-control. The luxury of getting what you want when you want it is a suffocating curse, like a pet that develops cold intolerance because it has been kept in a centrally-heated house for a lifetime.
This is what forms my ethos, and what has led me to the conclusion that I will never buy a home, unless I can successfully offset all the risks of doing so, which at this juncture, I dont believe I can, or my attempt at doing so would impair my freedom in some way. In the mean time, Im happy to save, invest, remain nimble, live nimbly, and wait patiently for a good deal.
Full disclosure: Im short GBPUSD and SVS (Savills PLC, traded on the London Stock Exchange).