Why am I going to work and adding value to society? Let’s think about this for a minute. Let’s say I go out and buy myself an average residential house to live in with a 20% deposit. Once I’ve secured this I’m then going to get myself sacked from my job. I’m also going to ensure that I don’t have any other assets so I’ll spending all my retirement investing low charge portfolio on Burberry, 54” flat screen televisions and a sports car. After all these are necessities in modern day Britain. So now I’m set to get myself onto the Government mortgage rescue scheme.
Let’s run the numbers. My deposit was 20% so I owe £134,241. Now because I’m Mr Average I’m on an average tracker deal of 3.65% which means I have to find £408 per month to pay the interest. Of course I shouldn’t worry because the government gives me 6.08% of the mortgage value which is £680 per month meaning I can pocket £272. In addition to that my house has gone up in value by £3,283. Adding this together means my average annual ‘salary’ is (£3,283+£272)x12=£42,658 all tax free before I even claim my Jobseekers Allowance, Family Tax Credit or the myriad of other benefits I’m ‘owed’ because I’m a ‘hard working family’. A worker would have to earn £72,301 before tax for the equivalent of this asset price inflation and hand out. What a country we live in! I should note that I do have genuine sympathy for people who are genuinely out of work and actively looking. I’m just trying to show what sort of society we live in and how I could potentially play the system.
My question now is how long the party can continue.
Chart 1 shows the Nationwide Historical House Prices in Real (ie inflation adjusted) terms. The real inflation adjusted rise is £165,653 to £167,802 (a monthly rise of £2,149 or 1.3%) as the UK Retail Prices Index (RPI) month on month also rose.
This chart also demonstrates that compared to average earnings property is still very expensive when a ratio is created of the Nationwide Historical House Prices to the Average Earnings Index (LNMM). In 1996 this ratio was as low as 607 and today the ratio stands at 1,166. If we were to return to that number the average house using the Nationwide Index would be £87,414. Will we ever get that low again?
Chart 2 shows the annual change in Nationwide property prices and compares this with the change in the average earnings index (LNMM) released to February 2010 (so a couple of months behind the house price data). It shows that the annual change in earnings has risen sharply but is a long way behind house price rises. Houses are again moving further from the reach of the Average Joe.
So in summary Government continues to keep the plates spinning and maintains the house prices up ‘good’, house prices down ‘bad’ mantra. Bring on the deficit cuts (note the government word is deficit and not debt. Ie the debt is going to continue to grow) is all I can say although will they be brave enough to remove the props from the housing market.
For now I’m staying well away from the housing market.
As always DYOR
Assumptions:
Last LNMM data is February 2010. Note first chart LNMM data is extrapolated to April 2010.
RPI data is extrapolated for April 2010.
Well that was really nice to read that... it seems great helpful information about UK property... But the property in UK is rising day by day and many other companies from other region are setting their business in UK because UK Location are great for business success ..
ReplyDeletePeter Steel - the author is talking about residential property not commercial which is a completely different beast. The bubble in UK commercial property burst properly some time ago and is now fair value; residential property on the other hand is grossly overvalued as a result of rock bottom interest rates and foreign speculators.
ReplyDeleteHi David
ReplyDeleteThanks for clarifiying. Yes I am talking about UK residential property which I mentioned in the first line of the post.
Unless I am failing to navigate your site successfully, it would seem that you have removed my two previous contributions, presumably because they don't accord to your philosophy. In essence, I was pointing out that you too are trying to get something for nothing: those spending all their money to claim a government subsidy are merely at the dishonest end of the spectrum. You can scarcely claim the moral high ground if you invest in gold - that is simple speculation. Somewhere I have seen figures indicating the growth in the amount of "money" in existence, showing that this increased exponentially in the last 10 years. This in turn had to be invested somewhere and it could not all go for investment in production, the supposed virtue of capital, hence asset price inflation. All that can happen now is to manage down this pile to prevent social disorder. Why do you think that you should be rewarded for second guessing markets? If you are so percipient, identify tiny local enterprises and loan them the capital they need to create something tangible. In closing, I cannot imagine what sort of life you intend to lead after retirement - entirely joyless and unfullfilled by the tone of your site. Or can you assure me that you are full of good works and contribute handsomely to charity?
ReplyDeleteHi Shutthedaily mail
ReplyDeleteI have most definitely not removed your contributions. The only comments removed are spam based or those trolling. You are neither of these but are offering some healthy debate. This is why I am here and I'm assuming why you are also on a site like this. Our previous comments are actually here http://retirementinvestingtoday.blogspot.com/2010/04/government-keeps-spending-our-taxes-to.html#comments
Please rememeber I am not a trained economist but today I can only see 2 places where the huge "increase" in money can go - asset prices or inflation. We've definitely seen the asset price bit but so far the inflation has not taken off.
I have never claimed that I am second guessing markets (that is in my opinion trading which I don't do) and do not claim that I am percipient. I have merely put together a mechanical strategic and tactical asset allocation based on some valuation techniques that have worked on. Only time will tell if they were correct.
Why is gold speculation? I see it as a commodities play (it's correlation is relatively low compared to equities) and also as another form of money. Additionally I'm starting to see it as a different currency which unlike paper money just can't be printed away. That's why it's in my portfolio.
Could you maybe have a read of my reply back to you last night before and let me know if it doesn't answer your other questions.
It would also be great if you could share how you would operate differently to help with the debate. What are you planning on doing when you are "low 40's" or even low 80's and either don't want to work or can't work?
You persist in looking at this as a technician, as indeed did everyone through the last several debacles in the financial market. I have found the article that talked about the way "money" had been created in recent times and will email it to you separately. Below is one paragraph to illustrate the point
ReplyDelete1. Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months to create the most recent $1 trillion and I don’t recall seeing an entire continent’s worth of factories, schools or bridges built during that time.
2. Household debt has doubled in only 6 years. Think about that for a minute.
3. Total credit market debt (that’s everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.
To continue, money is an abstract, originally created to facilitate the supply of goods and services - a means of exchange. It has no existence of itself and that is why it can apparently be endlessly created. Those who have worked and saved for retirement, however virtuous, are still expecting to live off the work of others. Why is that automatically reasonable? Just because you used to work? You will have become no less economically inactive than the idlers you despise. How should you live? That's why people reproduce. In the best poor societies the old are supported by their children and we should demand no more or less . Just don't expect as much as the remaining workforce. Try to think outside of self interest for once.
Further background on the artificiality of your view of "investment" can be found (today only, I think, at http://www.bbc.co.uk/iplayer/episode/p007dvhr/The_Interview_07_05_10_Michael_Lewis/) recording the background to the latest bit of money creation. Both sides of the story are technically brilliant but also barren and unproductive. Bear in mind also Lennon's perceptive line "Life is what happens while you are planning something else (or something similar)
ReplyDeleteHi Shutthedailymail
ReplyDeleteFirstly thanks for the article. For those that are following these comments the article mentioned can be found here http://www.financialsense.com/fsu/editorials/martenson/2007/0108.html.
I guess I look at it as a technician as that is something I am comfortable with. That said though I don't disagree with what you say. In fact I don't think anywhere have I said anything that challenges your thesis. To my knowledge all different types of money since civilisation (with the exception of gold I guess) have failed eventually. Our current money will be no different.
Nowhere have I said that I intend to become economically inactive. Did you read my reply to you here http://retirementinvestingtoday.blogspot.com/2010/04/government-keeps-spending-our-taxes-to.html#comments
No matter whether I like it or not some day I will not be able work. But that is no different to anyone else whether it be through illness or age. I can't change that. I think you have an issue with the current society in which we live rather than my methods themselves.
However, what is one to do? I am not an 'elite' who has the ability to change the way the world works. I am simply trying to provide for my family.
You have continued to challenge my methods however you haven't offered an alternative as I asked in my last comment. I only see 2 alternatives from where I sit today:
- follow the methodology of the masses and expect somebody else to look after me when I can no longer work, or
- take responsibility for my own actions and legally follow a plan that allows me to take care of myself.
For me I feel the second is the most morally correct.
If you do have an alternative I would love to hear about it. Would you be interested in preparing a guest post called 'an alternate retirement strategy to the retirement investing today methodolgy' so that you can present your alternative?
Finally, thanks for the healthy debate.
It is your expectation that I challenge. What set me off was your shallow moralising about the government bailout (which protected you, not those without asset) and the supposedly feckless. Why do you not grasp that the prospect of investment gains was created by the expansion of credit which allowed you to lend to others and receive interest? You thus were involved in the delusion. It is reasonable to work, be paid and to save in some manner for the future. But you expect to be able to multiply this money through speculation (which you make more acceptable by calling it investment). Whichever it is, someone else has to work to create the wealth to give you a return. Why should this be sufficiently large to allow you to be idle from an early age? or wealthy in old age? You are still relying on someone elses labour whether you get it from the state or not. Consider whether the articles I mentioned might not indicate that the old order has blown itself out and investment as you know it might not be coming to an end.
ReplyDeleteHi Shutthedailymail
ReplyDeleteI didn't ask the government to bail me out. If I had of lost money then that is the risk with places like the stock market. However what it would have meant is not another set of bubbles which we are currently seeing IMO. Instead assets would have decreased further (maybe a lot further) in price meaning (provided I held my nerves and continued buying)lower prices and bigger yields. Which way would I have been a bigger winner. I don't know and it wouldn't have changed my stance that the government shouldn't have bailed out the banks, housing, automotive etc.
I do not deny that the asset bubbles and inflation that we are seeing is due to credit expansion. That is fractional reserve banking and I can't change it. All I can do is operate within it. If a different system comes along then so be it. Yes that is some of my returns but that is the 'system' which as I am not an elite I cannot control or change. I was involved in no delusion. It is what it is.
I also have no expectation or feel I have an entitlement for that matter. I am just doing the best I can and if it works then so be it. All I can say is that I feel I have a better chance than if I did nothing, waited until I could no longer work and then depended on the state for food, clothes and shelter.
I also have never said that I intend to be idle from an early age. Did you read my early comments to you or my very early blog posts. I do not intend to stop work and sit on a beach. For me retirement is simply that work becomes optional. I also have never said that I want to be wealthy in old age. If you want me to define wealth here it is. Wealth is that my family and I are simply healthy, happy and not financially pressured. I don't want or need millions to meet that definition of wealth.
You have conceded that it is reasonable to work, be paid and to save in some manner for the future. Now we're getting somewhere. Maybe you can expand on this and tell me your strategy? This might then answer my previous questions to you. At the moment all I have is that my method is not appropriate which doesn't help.
Has the old order blown itself out. I don't know if it has yet or not. What I do know though is that history suggests that fiat currencies do not last forever.