Some annual returns stats to help frame the debate:
FTSE All-share 1956 to 2010 12.1% p.a.
UK Value Stocks 1956 to 2010 16.0% p.a.
UK Small Companies 1956 to 2010 15.9% p.a.
UK Inflation 1956 to 2010 5.6% p.a.
UK House prices 1955 to 2010 8.5% p.a. (h/t chefdave)
FTSE All-Share Infl. Adj. 6.2% p.a.
UK Treasury Bills 1955 to 2010 I/A 1.7% p.a.
I haven't got house price increases nor could I quickly find average base or mortgage rates for the same period.
Update:
But, I do maintain, that a house is not strictly an 'investment'. It's a place where you hang your head.
Tuesday 15 March 2011
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12 comments:
L, ta, most useful.
But if you don't have much money (and if you have a mortgage, by definition you don't) then it has to be safety first.
There are decades like the 1970s when you would have been far better off paying off the mortgage, and others like the 1990s when you'd have been better off investing in shares.
For the 2000s, I think you'd have been better off paying off the mortgage (shares fairly flat over the decade).
(it's easier to ignore inflation on both sides).
The numbers are for total return - capital gain/loss plus income re-invested, so the values are not really flat over any time period - they may of course be negative, but that's a good time to buy. Pound cost averaging and all that.
For many people it's a balance between long term saving and buying the best house they can afford. Taking a 44 year time period - a working life - investing regularly pays off in the end, and if you put away about 12% to 15% of your gross pay per annum you will be able to retire on a 'pension' of about 50% of your final pay. Don't forget that the vast majority of people cannot time markets, so why bother? Just keep it simple and cheap and try and capture market rates of return at the lowest cost.
At the same time work to move yourself into the property that you really want and can realistically afford, and then seek to pay off your mortgage.
Just extending the debate for the nonce these stats prove the lie of Lord Huttons state employees pensions reforms. Currently their schemes cost us upwards of 30% of salary roll. All that needs to be done is for the whole thing to be shut down and every one of them switched to money purchase schemes and the costs and benefits would be known. It would also connect the bastards to the real world.
MW, does this help?
http://www.nationwide.co.uk/hpi/historical.htm
My favourite financial guy, Garth Turner, suggests that in the current economic situation your house should be no more than 40% of the total value of your housing, savings, investments and debt (ie your net worth) and preferably below 30% to avoid the risk of losing more than you can afford. If it's much above that he suggests that you pay off the mortgage or downsize until it is below.
Of course those of us with a large mortgage debt or small savings may well find it impossible to downsize enough to get to the 30% level. He suggests that if that is the case we should be selling up, paying off the entire mortgage and renting.
So I guess that means by all means pay off the mortgage if you are someone like Lola where the house is 50% of net worth or less. If your house would be 80% of net worth even after paying off the mortgage then consider downsizing or selling up and renting instead because you can't afford that house (well you can but the risk of negative equity if that house value goes down is pretty high, too high really). Selling up and renting pays down the mortgage like nobody's business. And relieves you of worry about negative equity, council tax, house repairs and maintenance. Plus if you're renting you can now put the extra cash that you would have been paying on a mortgage into savings or investments instead so that you will be ready to buy again the next time that property starts going up.
CD, this is Lola's post not mine and those are house prices not mortgage interest rates.
D, fair enough, but at current market prices, housing is about 3/4 of all 'wealth' and shares, pensions, cash etc (they overlap) is about a 1/4. So it would be impossible for everybody to get within those ratios (unless house prices fell by, er, 80% or something).
As I was once "one of the bastards" and funnily enough "whilst a bastard" was employed in the field of pensions - including attempts to formulate "money purchase schemes" into which "state employees" could be enrolled when their final salary schemes were inevitably "wound up" {although in the event bringing in career average salary based schemes found most favour with opur "Lords and Masters" as being "an easier sell" could I just point out that some of us bastards remained entirely connected to the real world all the time - shame was, the same couldn't be said for our "Lords and Masters" who, whatever political colour or flag that might claim allegiance to, always seemed to live "mostly off planet" and see things such as "re-election prospects" and/or "pet ideological projects" as far far molre important than "real world issues" - just saying, is all - we bastards past and present are allowed to have a say I assume ....
Ah right. I guess that means that most of us should be renting then...
"My favourite financial guy, Garth Turner, suggests that in the current economic situation your house should be no more than 40% of the total value of your housing, savings, investments and debt (ie your net worth) and preferably below 30% to avoid the risk of losing more than you can afford."
Derek, surely it is the debt to net worth ratio that is important. If you have no debt, savings, pension or investments, but still have a house and an income, how can you be at risk of losing more than you can afford?
Shares every time - they're getting cheaper again too!
anon 18:30. My humble apologies. I should perhaps have said most of the bastards. That is 6m out of the 8m turning up for redundant jobs, plus their Lords and Masters in about the same ratio
That's true enough about the debt to net worth ratio, Bayard. And for those who have a house and an income there isn't an immediate problem. However all of us eventually reach a stage where we can no longer work. And if at that time we still have no debt, savings, pension or investments the income is going to disappear. Or at least drop to State Pension plus Income Support levels. At that point life will become a struggle.
Now a large number of people are in the position today where they are relying on the value of their house to fund their retirement. They haven't made any other plans because "real estate always goes up". These are the people who can't "afford" for house prices to drop. Sure they might not starve if prices do drop but I foresee a lot of beans in their future meal plans.
When I retire, I shall become Rupert Rigsby and my house will fund my retirement.
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