Valuing the Housing of England and Wales at County Level – Year 4

In my view (and unfortunately) house prices in this great country are driven by Affordability, which is one’s ability to service debt at current interest rates, and not by Value.  This is one reason why I’ve never bought a home, and now don’t intend to buy, choosing instead to move overseas.  So when/if salaries increase, the price of debt decreases and/or the government provides ‘help’ we can expect house prices to rise.  Let me demonstrate with one simple example showing how just one of these affects prices – average house prices vs average employee earnings:

Click to enlarge, Average house prices vs average employee earnings (in England and Wales at County level)

For me, clearly mistakenly, I’ve always been more focused on Value.  With this in mind every year at around this time I preparing a house Valuation metric that goes beyond that generally presented by the mainstream media by getting more granular and trying to Value housing at County level.  For completeness last year’s efforts can be seen here and you can track back to previous years from there.

My definition of Value is simply how many years of gross earnings (median and average) are required to buy an average house.  This is a simple average Price to Earnings Ratio (P/E) and is not unlike how some might value a company share.

For House Prices I am using average house prices as published by the Land Registry. This is calculated by using:

• The Land Registry House Price Index (HPI) dataset.  This index uses repeat sales regression (RSR) on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  It uses all residential property transactions made in England and Wales since January 1995 so covers buyers using both cash and mortgages.
• Average prices are then calculated by taking Geometric Mean Prices (as opposed to an arithmetic mean), to reduce the influence of individual values, from April 2000 and adjusting these prices in accordance with the Index changes.  They are seasonally adjusted. I am using the latest published data which comes from March 2016.  

The Valuation analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below.  Unlike the mainstream media I am calling high house prices bad (unsurprisingly the County with the highest house price is London at £534,785 and is shown in dark red) and low house prices good (the County with the lowest house price is Blaenau Gwent at £69,384 and is dark green) with all other prices shaded between red and green depending on house price.

I think I can, I think I can, I think I can FIRE in 6 months

Life is really busy.  No, that’s not right, let me try again.  Work is consuming me.  I’m pressured, stressed, exhausted and for the first time in my life that I can remember have so much workload that I’m failing to achieve what I’m setting out to do.  If I was a normal 43 year old working away to my current State Pension Age of 67 then I really would have to be doing something about it as it is just not sustainable long term.  Looking at my progress to Financial Independence tracker is however going to make me do something else instead.

Click to enlarge, My path trodden towards financial independence

Today, I have wealth of £938,000.  This is also my net worth as I have £0 in debt.  With a FIRE (financially independent and retired early) target of £1,000,000 and provided Mr/Mrs Market behaves him/herself I should be able to close that gap in 6 months according to my Excel spreadsheet.  That is not far away and now requires me to do some things over the coming months.

1. Pick an early retirement date

Into the melting pot for this decision goes:

• the weather.  Not much point moving in the middle of winter.
• tax efficiency.  As I’ll have the opportunity to work for only part of the year it seems to make sense to earn enough in a tax year to take me up to the start of the 40% higher rate income tax rate to maximise my FIRE wealth for a given work effort.
• work projects.  I do have some longer term projects at work that I would like to finish.  I know I don’t have to but for me at least I feel it is the right thing to do both for myself and those who work around me.
• assured shorthold tenancy (AST).  As a renter I have a tenancy period that I need to comply with.  There is no point paying rent on a flat that is empty.  

Working through each of these in turn and it looks like I’ll actually resign in late winter/early spring 2017 with a plan to be in The Med in late spring/early summer 2017.  So at this stage it looks like I will be overshooting what is physically possible financially and I’m ok with that.  I’ll only be 44 years of age after all.  It’s not like I’m planning to do One More Year (OMY) or anything like that...

2. Ensure my portfolio is right for distribution and not accumulation

When I built my investment strategy it was all about the accumulation of wealth.  That book is now fast coming to a close and I’m about to start a new book called Starting out in the Retirement Distribution phase.  My investment portfolio today looks like this:

Q1 2016 – Rocket boosters lit and then stayed lit

Quarter 1 has been what can only be described as one where the rocket boosters fired and subsequently propelled my personal finances forward at a rapid rate of knots.  I passed the one year to FIRE (financially independent retired early) mark during the quarter and then finished the quarter with wealth addition of some £55,000!  To put that into perspective that is more than half of what I achieved through the whole of last year.  Positively both my Saving Hard and Investing Wisely approaches made strong contributions:

Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)

SAVE HARD

I define Saving Hard a little differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.

Even with a large portion of my bonus going to those better able to spend it, including HMRC, I was still able to save some £31,000.  This was possible by once again keeping spending nicely in control.  In fact my personal rate of inflation (ex taxes) compared to Q1 2015 was actually -7%.  An interesting dynamic has developed here.  With FIRE being so close my better half and I seem to have just sub-consciously battened down the hatches as we can see the finish line which is then self-fulfilling.

Combining Earnings, Spending and Taxes together results in an average Savings Rate of 48% for quarter 1 against a plan of 55%.  Sounds like a pretty poor effort until I also mention HMRC took 47%, including some back taxes, with us living off the remainder.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceded Pass.  I yet again missed my savings plan of 55% but against a back drop of back taxes I’ll take it.  Savings were also still able to add 3.6% to my wealth, which is not to be sniffed at, even at this late stage of my journey.  Savings also continues to make the biggest contribution towards my wealth accumulation with 67% now having come from savings and only 33% from investments.  Compound interest is still not really firing on all 4 cylinders.

INVEST WISELY

Investment return for Q1 2016 (02 January 16 to 02 April 16) was a healthy 2.8%.  In 7 out of the last 8 years savings has made a greater contribution to my wealth than investments.  That theme has continued into quarter 1 with my investments contributing £24,000.

The decision that cost me £95,000

Back in late 2007, at about the same time as I was starting to think about saving hard and investing wisely, I seriously considered buying a home in London.  We were still planning to live well below our means and not be greedy but even so the small home we found would have still resulted in a big mortgage.  As I do with everything I did my own research and came to the conclusion that property in London was overvalued.  It was charts like the below that gave me that view, with at the time London first time buyer house price to earnings ratio’s having averaged 4.4 since 1983, while they were now at record highs of 7.1.

Click to enlarge, London first time buyer gross house price to earnings ratios

So as the type of person who tries to avoid buying anything that is overpriced I signed another Assured Shorthold Tenancy Agreement (AST) for our compact flat and we waited it out.  Roll forward to today and we can see what has happened to London house prices since that fateful period.

Click to enlarge, London historic house prices

Errors everywhere but I did get one thing right

My early personal finance records are sparse at best; however I was undertaking a bit of (pre)spring cleaning this week and came across an early retirement planning spreadsheet that was last updated in November 2007.  That’s just a month or so after I started on my FIRE journey.  It made for some interesting reading given my current FIRE position, so much so, that I thought it worth sharing particularly in view of some of the comments here.

On my FIRE journey so far I've found that Saving (Earning minus Spending) has been one of the most powerful accelerators towards FIRE.  To demonstrate to the end of February 2016 68% of my wealth creation has come from Saving while only 32% has come from Investment Return.  Looking at the 2007 spreadsheet I thought I could save £16,000 per annum and I wasn't planning on it increasing through my journey.  To contrast that assumption in 2015 I saved nearly £100,000.  Errors included thinking my Earnings had peaked and that I wouldn't be able to spend less than I was at the time.

I thought my investment expenses would run to 0.75% per annum.  Now ‘way back then’ Vanguard in the UK didn't exist but even so in 2015 they were down to 0.27%.  I also I thought my investments could achieve a real annualised 4.3% after expenses over the long term.  So far I've only achieved 3.4%.

I thought that in Early Retirement a safe withdrawal rate would be the 4% Rule – 4% of my wealth on retirement day increasing with inflation annually.  Today I think 2.5% is more appropriate.  That is a big error.  For a person wanting to FIRE on £20,000 it represents an extra £300,000 of wealth that needs to be accrued which is a big chunk of change.

I thought that the UK would be home and that I would need £28,000 of earnings per annum to live well in FIRE.  Today I think I’ll need closer to EUR25,000 and we’re now 99.9% Continental Europe bound.

Crashing all those numbers above together plus putting some home considerations into the mix made me think I’d need a little over £700,000 to FIRE which included some mortgage payments.  Today I think I’ll need £1,000,000 which includes paying cash for a home early into FIRE.