The property market will crash (I think)

We have been trying to buy a flat for months and many months ago (August 2019) agreed on the purchase with the seller. It’s taken a long time to sort out some legal paperwork on the seller’s (the estate agent loves the word “vendor”) side of things. A few weeks ago, we got word from our solicitor that he has now finally received all the paperwork he needs to continue with the purchase.

However, Covid-19 happened and he asked us if we were still planning on to continue with it. At first, we thought that this is fantastic news and we should buy the place. After some thought, we got more cautious as the UK economy is headed into a massive recession, no-deal Brexit is more real than ever before and my employment isn’t that secure.

Yes, we’re lucky that both of us can continue to work from home but I can see business drying up in the coming months (although summer is always a bit slow). My girlfriend doesn’t worry as her job (in mobile gaming) is going well and her employer is making record sales as more people are at home and have time on their hands.

We decided that we should renegotiate the price on the flat and offered to buy the flat at a 5% lower price. The estate agent replied a week later and declined our offer as property only goes up in value (paraphrased and read between the lines a little). This was disappointing news and we decided to pull out.

Luckily it’s only £250, which we lost out on, which were some legal fees we incurred early on in the process.

I’m a bit of a crashist when it comes to the property market. We have 7.5 million people on furlough as of 10th May 2020. Most of them are earning less now (80% of salary up to £2,500 gross p.m. where the employer could voluntarily top-up to 100% of salary), which means there’s less demand to buy properties. Similarly, I predict, quite many of today’s furloughed staff will have no job to go back to in a couple of months’ time.

Unemployment is at 4% as at Feb 2020 but this is expected to double once we have the numbers available. This is not good for property prices.

Millions of people have requested mortgage holidays. A lot of people here are already unable to pay their mortgage, what’s going to happen in a few months’ time when the furlough ends? There will be defaults and people will lose their homes.

The estate agents such as Knight Frank and Savills etc have come out with predictions of 3% or 5% falls for the year, which will rebound in 2021 – what a joke. They have a vested interest in saying that things are all good and we should all be buying property left, right and centre. The fall in property prices will be significantly more than just single digits. This crisis is going to be huge as big parts of the economy are shut down.

How do you imagine the airlines go back to normal? The tube with wings where everybody breathes the same air is impossible to make safe for travellers. How do you do social distancing on a plane without big increases to ticket prices? I like many would be unable to fly to, say Spain, for a holiday if a condition of entry to the country was for me to self-isolate for 2 weeks on arrival. The travel industry will be in a new world of pain.

London has many AirBnb’s as well. Guess what, they’re empty because nobody can travel. That’s not going to change for a while. I expect these chaps will flood the market with either long-term rental properties or try to sell and get out of this business. We shall see. This is good news for lower rents and lower property prices.

What about a vaccine? Well, mostly the fact that it doesn’t exist. Even if it did, it would take many months to produce it and distribute it all over the world for everyone to feel safe again. I’m not saying they won’t find a vaccine or develop a cure, I’m saying it will take time, during which the economy will suffer.

OK, back to property prices. Some of the highest earners are in the tech sector – programmers and what not. They can work from home and many (e.g. Twitter) companies have already said they are happy for all their staff to continue working from home even after the plague. This has increased demand for homes outside of cities. Why would somebody on a six-figure salary pay £3,000 on rent in a Central London flat, if they could own a nice home outside the city? I expect a lot of high-earners to relocate further outside big cities where their money buys more happiness. This will drive prices down in big cities but increase them in smaller towns.

My friend asked me how long do I want to defer buying and paying rent for nothing. If I buy now, I’d still be building equity and have an asset. The problem here is that I’m not looking to buy a forever home. I’m not sure I will be in London long term. Therefore, buying now and selling within a couple of years may be very expensive if property prices crash. I could, of course, rent the property to tenants when I move elsewhere but that’s not something I want to do – I don’t have an overwhelming desire to be a landlord and deal with fixing boilers, washing machines and water leaks. It would also be difficult to re-mortgage a few years down the road if I was in negative equity and there’s a risk I’d end up paying more in interest.

Why take all the above risks? The only way I’d take these risks is if the upside was proportional to them. I’d be happy to buy if I got a price 20%+ cheaper than the prices in the pre-Covid-19 world i.e. in Feb 2020. I think it’s a bad idea to go ahead with a property deal agreed in the pre-Covid-19 world now that we are in the post-Covid-19 world. You should only consider doing that if you are buying something for the long term.

My plan is now to sit tight and adopt a wait-and-see approach. We also decided to move to a cheaper rental flat as living so centrally doesn’t have the benefits it used to have (everything is closed – cafes, restaurants etc, walking distance to work isn’t that attractive as we work from home). We are paying too much for the luxury of living in Covent Garden in Lockdown London.

My employer has also said that they will take a much more cautious approach to get back to normal compared to any Government guidance as a big part of our clients are elderly and more likely to suffer health problems from Covid-19 infections. My girlfriend was told that they expect most of staff in her company to work from home until at least September 2020.

Taking all of the above into account, I think we have made the right decision by not buying the flat. I will keep you updated once this changes. In the meantime, we will continue to squirrel away money for an even bigger deposit.

Take care!

Should you ever use a financial advisor?

financial advisor behind a computer

There’s a lot of criticism in the FIRE community when it comes to taking advice from financial advisors. I’m here to address the main concerns:

1) Financial advisors will still get paid even if your portfolio loses money. They don’t care about what investment performance is achieved.

Wrong. Of course, financial advisors care about their clients and their wellbeing. Advising clients is a long term business and not about shafting somebody to make a quick buck.

Yes, most advisors charge say 0.5%-1% to manage a client’s portfolio. Yes, that ongoing adviser charge is payable even when your portfolio has lost money. However, if financial advisors lose money in your portfolio, it doesn’t mean they haven’t done their job to justify their ongoing advisor fees. Quite often, the portfolio an advisor looks after suffers significantly smaller losses than a portfolio picked by clients themselves. I’ve seen it many times myself as clients like to have the majority of their wealth managed by professionals but leave a small pot of “play money”, which is typically invested in the latest hottest stocks with very little diversification.

The “play money” can go through wild swings and at times look like a fantastic investment in comparison to the advised portfolio. However, we’re not comparing apples with apples here if the advised portfolio is significantly less risky (has less in equities) and the “play money” pot is 100% invested in shares.

Advisors are interested in growing their client’s portfolio because if the portfolio grows, so will their fees because their 0.5%-1% fee is applied to a bigger portfolio.

Competition is another driver which necessitates the requirement to grow a portfolio. There are many attempts by competitors to steal a client’s portfolio. Somebody might offer a better track record or lower charges, or an improved service when looking at the client’s monies. Clients also speak with friends and family and can be influenced by them when moving monies around. Advisors know this and that’s why they do what they can to grow clients’ assets and keep them happy.

2) “I can do it myself. I am better off keeping my costs low and as an advisor is an additional expense, I should avoid it.

Do you do your own plumbing? What about your accounting? Do you know how to fix your car’s engine? Would you extract your partner’s wisdom teeth?

It’s hard to know everything and there’s a reason we have specialisms out there. They all charge a fee for their service – why should you not want to pay for a service you receive from an advisor? If you don’t want the service, you don’t have to sign up to it.

computer screen with market charts

The fact is most people know nothing about investing and the financial markets. They would much rather have somebody else look at their portfolio than deal with it themselves. If you are a busy entrepreneur or a mother of three young children, you don’t have the time, inclination or interest to research the ins and outs of building an investment portfolio – you just want it to be sorted and not worry about it. Financial advisor help with that.

A financial advisor is also your investment coach. Every time there is a wobble in the stock market, they get a massive increase in calls from scared clients. People call their advisors and ask what’s being done to prevent losses or demand that everything is sold to cash right this very instant as it’s their expletive money! Selling during a market correction is, of course, a very bad idea as people would unlikely be able to benefit from a market recovery. Often sellers would lock in a permanent loss of capital, miss a big part of the recovery and get back in at higher prices. An advisor would explain this to a client and advise them to stay cool and carry on. Ask yourself, is it worth paying somebody 1% a year and risk missing out on 10%-20% of investment gains because you felt better staying in cash? I’ve seen clients who gave up on the stock market after the 2008 crash and have held nothing but cash since – a good advisor would have helped them achieve much better returns than cash ever could.

If you know how to invest and are comfortable making investment decisions, then more power to you. You do not need an advisor to look after your portfolio. However, there are other things you might be able to benefit from such as tax planning, estate planning and protection (insurance) planning. For example, do you know what’s going to happen to your FIRE strategy and your family if you’re unable to work due to a serious illness (cancer or heart attack) or your partner dies? Do you have a will, if not, do you know what will happen with your money on your death? Do you know what a lasting power of attorney is? Do you know how much inheritance tax your family will pay when you’re gone? Should you take all of your pension tax-free cash now in one go or in stages? What should you do with the £321,472.89 transfer value of your defined benefit pension? Oh, you’re divorcing – do you think lawyers and judges have a good understanding of financial assets to ensure how to split the marital assets in a fair way? Do you think you need advice?

investment growth on a screen

3) Many people think that an advisor just invests your money.

Financial advisors do a lot more than just invest client’s money. They work out the best way to reduce taxes by using different tax allowances, tax exemptions and make changes when the regulatory environment changes.

The best examples are in the pensions world. There have been massive changes in the UK pension legislation and these can have a huge impact on somebody’s finances. For example, not having your children nominated as death beneficiaries on a pension could mean that a big tax charge is payable when your children inherit the pension. No, this is not an inheritance tax charge, it’s income tax. If you die after age 75 (and most people will) with monies in your pension and your child (or any other pension beneficiary) takes the inherited pension money as a lump sum paid into their bank account, it would be fully taxed as income. How would you feel if you inherited a £500K pension and had to pay £200K+ to the taxman? You could have kept it all in an inherited pension account, if you had used a good financial advisor. This isn’t common knowledge and the average person on the street has no idea how these things work. Would you be OK paying somebody a relatively small fee to avoid paying many thousands of tax down the road?

Advisors add value, just like a dentist, a mechanic or school teacher. If they didn’t, they would be, quite rightly, out of business.

4) Advisors are all a bunch of sleazy salesmen.

Yes, financial advisors sell products but their main value is in providing the service of financial advice and they charge for it. It used to be the Wild Wild West in the UK as anybody could call themselves a financial advisor and start flogging financial products, which paid them the biggest commission. This is no longer possible. Commission payments have been largely outlawed (only possible with insurance products) by the regulators. Client protections have been improved and advisors can be held responsible for mis-selling any products.

The main thing advisors sell is advice – the products are just a tool to achieve the clients’ objectives. It’s common to agree on the fees with clients in advance so that they know what becomes payable and when. There’s no smoke and mirrors anymore. Charging has become much more transparent and people know where their fees go.

A good advisor will not sell you something you don’t need.

The first meeting with an advisor is almost always free of charge or at the advisor’s cost. It’s an opportunity to discuss your situation with the advisor to see if there are any opportunities to start a mutually beneficial relationship. The advisor won’t give you any advice in that meeting but it might be worth having a discussion to see if there’s something obvious you should be doing. This could be as simple as checking with your employer if you’re maximising your pension contribution matching arrangement.

Summary

People need advice. I think they will make significantly better decisions if they take advice from financial advisors. Even if you don’t value their investment advice, there is so much more you can benefit from using an advisor. As mentioned above, the first meeting (often) doesn’t cost anything and if you don’t like what they have to offer don’t go ahead with it. Shop around. You can always disagree or ignore advisors and continue going your own way.

When you think about it, among other things, financial advisors help people retire and pull the trigger to stop working, which is exactly what FIRE does. Maybe they’re not so bad after all.

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Covid-19 pandemic handouts

The UK government is taking unprecedented measures to tackle the economic impact of this pandemic. This includes both corporate and individual welfare.

I already ranted about corporate welfare in my last post. Now it’s time to hate on the government some more.

I’m not exactly in favour of handouts. Full stop. It doesn’t matter whether these are to a business or to individuals who have made poor decisions. Both people and businesses should take responsibility for their actions or lack thereof.

In my opinion, giving out handouts increases reliance on the government and reduces a society’s capacity to look after itself. Big business has learned that they can continue to take big risks because the government will be there if the shit hits the fan. Same for the little guy, who feels he will always be taken care of by Mr Government – from cradle to grave. Nobody needs to work on improving themselves, inventing new services/goods etc – what’s the point? You will be OK. Right?

It’s a slippery slope. Many handout programs also make it difficult to get off handouts as your income would then reduce, rather than go up. Why go to work for £1,000 p.m. net if you get to lazy around at home and collect £600 without any travel or work expenses? (full disclosure I don’t know what the actual numbers for benefits are, but the point remains valid)

Having said that, I feel that bailing out the little guy seems more palatable to me. Companies with big pockets should be able to plan for contingencies, but the average Joe is clearly more vulnerable and may not have the resources or capacity to even consider this. This is a societal failure. This is a government failure.

We should all be taught to save for a rainy day, invest wisely – not just in the stock market, but in yourself – your education and your skills. Basic financial education needs to be a core part of the curriculum.

Almost 10 million UK households had no savings whatsoever in 2017. Wow! What a sad state of affairs! Even the smallest emergency would cause massive hardship for these guys. It’s so easy to end up in debt and before you know it you’re bankrupt. As a wealthy nation, the UK should do better.

The government is now paying salaries for people who can’t work due to Covid-19. This is 80% of salaries up to £2,500 per month with loads of terms and conditions, which are complicated to understand. This is another failure of the government – they look like the good guy trying to help out their people. But they make it difficult to navigate the benefits system (probably on purpose) so that fewer people apply for it. It’s quite genius when you think about it – politicians and bureaucrats will later say they helped everybody get back on their feet when trying to get re-elected. Never mind they made it difficult to access these benefits.

It is what it is. I hope things improve and that people learn from this crisis. Stay safe!