Sunday, May 27, 2007

Here's a Hint: Move

Which also applies to people who own homes in So. California, and was especially true in '05 & '06, before the market peaked there.

Hell is buying a house

By India Knight
From The Sunday Times
May 27, 2007

[All emphasis added]
I’ve never understood the point of giving, or leaving, one’s adult, able-bodied, intellectually capable children masses of money.

People in late middle age have hopefully earned their own living for several decades and don’t have the urgent need for an injection of cash that young people do.

My notion was that I would buy my children a small flat each when they became adults and that would be that - they could put their back-breakingly expensive education to use for the rest and be grateful.

This idea, always boldly optimistic given the chaotic state of my finances, now seems more hilariously improbable by the day: who on earth can afford to buy any kind of property in London? At the rate things are going, they’d be lucky to get a shed each - or, more realistically, their own shelf in a communal shed.

Last week Knight Frank, the chartered surveyor, said London house prices rose by more than 33% in the 12 months to the end of April - the fastest rate of growth since mid-1979. A house worth £100,000 in 1976 would now be worth more than £4.1m.

Data from Knight Frank also revealed that the supply of available property fell by more than 50% in the first quarter of this year, while the number of prospective new purchasers increased by 17%.

What with super-rich foreign buyers and City bonuses, the property market has gone mad, madder even than it was in the 1980s, so mad that there’s nothing anyone can do about it except throw up their hands in despair and wait for the crash that’s been predicted for a couple of years now but shows no sign of arriving, even though Jon Hunt, the founder and owner of the aggressive estate agency chain Foxtons, sold out last week for an estimated £390m.

The Organisation for Economic Cooperation and Development has warned that UK property prices are among the most stretched of any major world economy, and that the housing market in Britain is overvalued by up to 65%. Surely something’s got to give because how - and where - are people supposed to live?

You have [owners] on the one hand, beside themselves with joy to discover that their unexceptional house in an unexceptional area is now worth a monstrous sum.

But this doesn’t mean anything in real, rather than paper, terms, because property prices rise commensurately across the board, and the numbers are now so elevated that they become meaningless - like hedge-fund managers’ bonuses, we’re talking what for most people is unimaginable, joke money.

If your family house is now worth £1m and you want to move to a better area and have a bit more space, your £1m is going to get you nowhere: unbelievably, if you head for the “desirable”, more family-friendly parts of London, your £1m becomes risible.

You could just about go and buy a big house in Hackney, but that’s probably not quite what most people have in mind. Which means that once you’ve finished congratulating yourself on your acumen in buying your house for a fraction of the amount it’s now worth, you have to borrow punitive amounts in order to move “up the ladder”. Which wasn’t part of the plan...


I agree with the bit about giving your kids money while they're young-ish, and not waiting to leave it to them upon your death, for the reasons given - especially since there might not be very much left, if you have a long life and health problems.

But if you're lucky enough to have a home that's somehow become worth £1m, you have more choices than to stay in the home, or sell and try to buy another home in a vastly overvalued market, which is a rather zero-sum choice.

You could also sell, and emigrate.

As in the U.S., capital gains from the sale of a primary residence are apparently tax-free in the UK. If you've owned the home for a number of years, say 5 - 10, then after paying selling costs and the mortgage, you're likely to end up with something in the vicinity of £500,000, which at today's exchange rate, is around
US$ 990,000, or $ 1,070,000 Canadian.

Either way, roughly a million dollars will set you up for life in the U.S. or Canada, UNLESS you feel the need to live in the most-popular cities of either nation.

But having travelled extensively in both nations, I can attest that there are hundreds of lovely, sophisticated, urbane, and cheap cities and towns that happily exist in "flyover country".

So you'd have basically ended your need to work for a living, and could instead devote your time to doing whatever it is that really sets your heart on fire, which is true wealth in my book.

It's a little trickier for Californians, since although they could end up being several hundred thousand dollars richer, it's far more probable that they'd need to continue to work. But still, unless your career can only be done in Cali., if you've owned for at least five years, you could sell in SoCal, and move to the Southeastern U.S., or to the Midwest. Then you could buy a comparable home free and clear with the profits, and live with the luxury of no rent or mortgage payment.

And if you're willing to live in a less-developed nation, well, then the sky's the limit. I've read that if you don't have to depend on the local economy for a living, then Argentina, India, Mexico, Panama, and Nicaragua are really cheap, and offer first-world living in the major cities. My youngest brother lived in southern Brazil for a couple of years, and he says that it's the same there: A very low cost of living by American standards, and all services available.

You could live like Royalty with what would be a middle-class income by G7 standards, and never touch your capital.

4 Comments:

Blogger Bret said...

"Either way, roughly a million dollars will set you up for life..."

The question is just how many people are just how set up and for how long.

One older person living somewhat modestly? Sure.

A young family with children looking at putting them through college? I don't think so.

May 28, 2007 10:00 AM  
Blogger Oroborous said...

With all due respect, you probably think that because you live in San Diego, one of the prettiest, least-connected-to-reality locales in these United States.

As I stated in the main post: "UNLESS you feel the need to live in the most-popular cities of either nation."

So yeah, southern California's right out.

But give a family of six a million bucks in Salt Lake City, or especially Junction City, Kansas or Augusta, Georgia, and it truly is enough for life.

Assuming, of course, that the kids go to State U., and not the Ivy League.

May 28, 2007 3:33 PM  
Blogger Bret said...

Do you really think that, other than housing, San Diego is really that much more expensive than anywhere else?

To me food seems cheap, I don't use (or even have air conditioning), low heating bills, clothes seems to cost about the same as anywhere else, freeways are, well, free, etc. Maybe medical is significantly higher, but what else is there?

I do intend to support the daughters if they get into and want to go to a more expensive college. I only have two, but if I had four, that'd be a million bucks right there.

May 28, 2007 4:49 PM  
Blogger Oroborous said...

Do you really think that, other than housing, San Diego is really that much more expensive than anywhere else?

Beats me.

Maybe I am atypical, but I would have zero problems making a million dollars stretch over the next hundred years, and I have five brothers and sisters, with a total of 21 children between them, who could do the exact same thing.

This I know because we all currently live happily on less than the net income we could get from investing a million dollars.

So I don't really comprehend how anyone could believe that it can't be done, unless that person lived somewhere where the cost of living was so high that $ 100K/yr was seen as a "decent but not outstanding" wage.

...but what else is there?

Auto insurance, for one. You'd pay 20% of what you pay now, if you lived in Salt Lake City.

Health insurance costs are also highly variable, depending on location.

As far as college goes, my opinion of spending a quarter-million on higher education is that it's an obscene waste of money, unless the student comes out of it with an engineering Ph.D., or as an M.D.

My budget for a child's higher education tops out at $ 75K, maybe add another $ 50K for grad school.

Unless it's medical school, or MIT.

May 28, 2007 7:52 PM  

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