Property Renovation Lessons III

A return to the Property Renovation series, picking up from where I left off in part II considering internal fabric and structure. Here I’ll look at room specific construction, layout and furnishings.

Dry Rooms

I am using this as a catch-all for lounge/ living rooms, dining rooms, bedrooms, offices, corridors… basically any room that doesn’t involve plumbing beyond central heating radiators.

The vast majority of fittings and furnishings in these rooms will be cheap to fix and replace. I’ve covered the walls and floors themselves in part II, but what about the added features. There’s a brief ‘Bluffers Guide’ to period features available here, which I’ll expand on in part (1).

Architrave

Is the wood panelling surrounding doors, windows and cupboards, which covers where plaster would crack over time through repeated movement. Fancier houses have fancier architrave. Cheap modern renovations or late 20th century houses often have very simplistic architrave. There’s actually very few styles and most have been around since the Victorian era, so it’s easy enough to replace and match. At worst, you can have a specialist company make a pattern and mill you some to match.

Image Credit: Pinterest

Ceiling Roses

Generally seen in older properties, ceiling roses first started appearing in the 1600s in affluent plastered homes as a ceiling decoration for chandeliers (2). They spread through the 18th and 19th centuries, gradually evolving in design such that you can use design elements to date a room if you’re a proper nerd. By the 1850s developments in plaster meant that a ceiling rose did not have to be sculpted by hand, but could be cast in a workshop and sold in large volumes. These days you can get them in polystyrene (why?), plaster or metal (even more why?) in various styles off the shelf. Ceiling roses only really suit a room (IMO) with a 12-foot plus ceiling, but can be a good way to add period features back in quickly.

Image Credit: Victorian Cornice Company

Corbels

In a similar vein, corbels were originally simple projections from walls which held up structures above. The Victorians took inspiration from medieval builders in designing patterned corbels, which became more decorative (3). They reached a point of being entirely decorative, often non-weightbearing and made of plaster. They can also be found on fireplaces and shelving.

Image Credit: Pinterest

 

Cornicing and Coving (and Friezes)

Cornicing is the decorative moulding found at the junction of wall and ceiling. Technically cornicing is actually any form of horizontal decorative element that tops a building feature, the word cornice coming from the italian for ledge, and so external decorative moulding is also cornicing (4). We use cornicing interchangeably due to classical description of internal cornice over a frieze, with an architrave below. Cornicing tends to therefore refer to more intricately patterned mouldings, whilst coving is simpler. Cornicing and coving both come in plaster, polystyrene (and GRP/ other plastics) and wooden forms. Repairing damaged plaster cornicing can be pretty difficult, so always worth checking the state of all rooms. In really smart houses, echoing their classical roots, you may find plaster friezes below the cornicing and above the picture rail. Again from the 1850s onwards these could be cast in complete lengths and then fitted on site. Many of these skills have now been lost, and heavy successive coats of paint can hide detail, so finding such features in good condition is a treat.

 

Image credit: The Victorian Emporium

Dado rails and picture rails

A dado rail sits at around 90cm from the floor, and was originally used in the Georgian period to protect the wall from chair backs during formal dances (5, 6). They fell out of fashion but then returned as a separator for friezes or anaglyptas.

Picture rails have been around since the 15th century, but again we have the Victorians to thank for their widespread use as the lowly proletariat added them to their parlours as a fashionable way of hanging pictures (7). That is still what they’re for. If you have picture rails, please use them, don’t then stick a nail in the bloody wall. As ceilings got lower so did picture rails. As such, there is no correct height, picture rails can be placed anywhere between coving to architrave, but are generally placed 30 to 50cm (12 to 20in) below the ceiling. Picture rails are a great feature for a period home, and painting above in a lighter colour can add to the feeling of height as well as lightening up otherwise imposing rooms (8).

Image Credit: VintagePropertyRestoration.co.uk

Skirting

Serves the same function as architrave, masking the gaps between edges of plaster and floorboards which are likely to move. Skirting began to be used in the Georgian period, but again became popular in the Victorian era (9). The more grand or ornate the house, the taller and more intricate the skirting, before gradually becoming smaller again up to the 1980s. Much like architrave, skirting now comes in plastic, softwood or metal forms, and can be made to order to match previous designs. It’s worth pointing out the difference with wood panelling, traditionally in the UK called wainscot, a much older technique pre-dating plaster. This dates from when buildings were stone, and wood panels were added to reduce draughts and keep the room warmer. Later they became decorative. Out of fashion currently, and you’ll need a carpenter to repair (10).

Image Credit: Pinterest

All of the above furnishings and fittings can be added back in with care and attention to detail (8, 11). The ’70s has a lot to answer for in terms of removal of features, but equally the current pre-occupation with Victorian features may well go out of fashion. We’ve viewed our position as custodians, and tried not to remove features of our property as we’ve renovated, even if we don’t like them.

Fireplaces and chimneys

For as long as there have been dwellings, humans (great apes) have had fireplaces. These developed from central cooking fires, to hearths, to the inglenook. These were enclosed hearth areas off a main room, which incorporated a cooking area, a main fire, and sometimes bread ovens etc (12).

Image Credit: Wikimedia

These enclosed hearths were gradually incorporated into the room while retaining the grate or back. Cast iron firebacks were used to retain and radiate heat. Decorative surrounding were added in the Louix XIV, XV and XVI periods, extending into the Georgian period with more classical plaques or motifs (13). In the Victorian period developments in mass metalworking allowed for cast iron insets for fireplaces (14). These, and stylistic developments are most commonly seen today. Due to the gradual development of styles over time it’s possible to date most fireplaces to a rough decade, like the Victorian one below (13, 14). Reclamation yards usually have a good selection of styles, and reproductions are available. 

Image Credit: FireplaceAntiques.co.uk

From the Edwardian era through the Art Deco period fireplaces were more commonly concrete and tile, and these can be harder to repair though replacements are available (15). The first electric fireplace came along in 1995 (just an overgrown electric radiation to me), and modern fireplaces are usually more about home interior design than serving as a traditional focal point. Make sure to match your new fireplace to the correct era. 

Image Credit: c20fireplaces.co.uk

A significant caveat and kicker when looking at properties to purchase or for renovations is around chimney breasts. These are the (usually) brick structures surrounding the fire and flue up to the chimney. They support the weight of the chimney above, and are often integral to the structural design of the property (16). Where fireplaces and chimney breasts have been removed for design or space purposes always check this has been done to regulations and by someone who knows what they’re doing. Because of the weight carried above it would be usual to take the whole chimney out, not just a ground floor section. If this is the case then permanent support for the chimney above will need to be inserted, usually designed by a structural engineer (17). Beware the cowboy!

Wet Rooms

Bathrooms

For some, the place to brush your teeth and shit, hopefully not at the same time. For others, a place of tranquil relaxation. Interior design styles with bathrooms seems to change yearly, so I’ll only briefly touch on things here. The Victorians, they obsessed with cleanliness, again kicked us off in the modern understanding of bathrooms once they mastered hot water, cast iron baths, plumbing and Mr Crapper added his flourish. Although I must admit, if I get the resources I’d go full caldarium/ frigidarium.

Image Credit: Hevac-Heritage.org

These spread after WW1, though your lowly commoner only really got indoor toilets and bathrooms post-WW2. Early versions had a water heater (often gas) next to the bath. During this period most fixtures were cast iron or ceramic, and decoration was often in the form of tiling. The claw foot freestanding bathtub began to disappear due to space constraints, and because they’re a pain to clean around (18). Matching sets became fashionable, and with the uptake of coloured plastics we reached the avocado bath era (see part 1). Finally, in the 90s and 00s everything went sanitary white, for that sterilised clinical slab look.

Badekar og varmtvannsbereder

Image Credit: Norsk Folke Museum

Lightweight plastics and modern manufacturing methods mean there’s a smorgasbord of choice. Modern style appears to be going more slimline – low rise freestanding showers and built in toilets. Not my personal taste as they can be a pain to DIY repair. Lots of classical designs are also being re-used or updated (19). Even the bloody avocado bath (20). So don’t rip it out just yet, the design world is your oyster.

Kitchens

Tied in with the hearth and central room for most of history, the spread of kitchens to the masses also came with the Victorians. This time as they cleared people from shared living slums to their own private homes. This coincided with wood or coal-fired stoves, which were much more efficient and quicker than open fires (21). These were developed to run on gas (1826) and electric (1912). Victorian kitchens were utilitarian workspaces, often with a Belfast or butler sink in a separate scullery (for wet cleaning work) and foodstuff stored in a pantry. The late C19th and early C20th saw these spaces opened up and incorporated (you can’t fit a scullery in a miner’s terrace). They’ve gradually become cleaner, sleeker and with more accoutrements as time has gone on. From a renovation point of view kitchens can soak up money, and you largely get what you pay for. A quick repaint and re-tile may be a few hundred, a second hand or cheap kitchen may cost you £1-3k, decent high end kitchens run to tens of thousands. Buyers choice.

Image Credit: John Desmond/ Veterans United

Renovation potential

How many thousands of articles are there on assessing renovation potential? Everyone wants the short cuts. So now you’ve read my rough guide to features here’s some tips:

  • Beauty is in the eye of the beholder

Most people (I think) will at some point want to make a stamp on the property they own. A lot of these stamps are highly personal taste. What you think is renovation, updating or beautifying may not be what a buyer or renter wants to see. Know your target: is this your forever home, a five-year stepping stone, or a BTL. 

  • Know the local ceiling price

Leading on from the above, there’s no point buying a three-bed terrace and then throwing in a £30k kitchen, extension, basement and loft conversions if after all that it’s only worth £100k. (Caveat: does not apply if you consider it your forever home). Go on Zoopla or Rightmove and look at the sold house prices for a feel for maximum value (22). For BTLs there’s a good calculator at South St made by one of the r/UKPersonalFinance people (23)

  • The ugly work can add the most, but might add nothing

Before thinking about painting, that new bathroom, the six-burner rangemaster, do the shitwork. Make the house warm, dry, secure and free of damp. Structural defects may be hidden and can cost huge amounts to correct with no direct gain to property value. Central heating, rewiring and re-plastering are messy jobs, but will almost always add value. The jobs which need special skills and are the most difficult are often the ones that add the profit (22, 24, 25).

  • Know your limits

If you’ve never held a paintbrush then raising the roofline for extra head space in that loft conversion is probably a bit too much. Be prepared to leave stuff to professionals (26). One man with the right tools could do something in two days that would take you two weeks. Brickwork, structural work, roofing, plumbing, and electrics all require specialist skills and kit. Plastering, carpentry and painting are all better with experience. 

  • Get it certificated 

Linked to the above, tradesmen will be insured and appropriately qualified. Many property changes require certification. The sob pages of the tabloids are filled with stories about eejits wasting money (27, 28). Get multiple quotes. Get planning permission. Get it signed off and keep the certificate somewhere safe (29).

Final Points

Here’s three take homes if you can’t be bothered remembering all that:

  1. Know your worth – that overtime at your day job may be a better return on investment than DIY
  2. Know the value – of the local property, and how long you’re willing to hold it for to calculate cost/ benefit/ return on investment
  3. Get multiple quotes, use reputable traders, get the certificates

Hope that was useful!

The Shrink

References:

  1. https://www.houzz.co.uk/magazine/a-bluffers-guide-to-identifying-period-features-stsetivw-vs~79477800
  2. https://www.prickettandellis.com/period-features-a-rose-by-any-other-name/
  3. https://www.patterncut.com/history-of-corbels-medieval-modern-architecture.html
  4. https://en.wikipedia.org/wiki/Cornice
  5. https://en.wikipedia.org/wiki/Dado_rail
  6. https://www.victoriansociety.org.uk/advice/plaster-mouldings-and-dado-rails
  7. https://www.1900s.org.uk/1900s-parlour.htm
  8. https://www.vintagepropertyrestoration.co.uk/blog/55-picture-rail
  9. http://allenpartnership.co.uk/a-brief-history-of-skirting-boards/
  10. https://en.wikipedia.org/wiki/Panelling#Wainscot_panelling
  11. https://www.victoriansociety.org.uk/advice/plaster-mouldings-and-dado-rails
  12. https://en.wikipedia.org/wiki/Inglenook
  13. https://www.homebuilding.co.uk/how-to-choose-a-fireplace-and-identifying-historical-design/
  14. https://www.fireplaceantiques.co.uk/history-of-antique-fireplaces
  15. http://www.c20fireplaces.co.uk/rfpi
  16. https://en.wikipedia.org/wiki/Chimney_breast
  17. https://www.homebuilding.co.uk/how-to-remove-a-chimney-breast/
  18. https://www.brownstoner.com/architecture/victorian-bathroom-history-plumbing-brooklyn-architecture-interiors/
  19. https://www.realhomes.com/design/traditional-bathroom-ideas
  20. https://www.telegraph.co.uk/property/interiors/avocado-bathroom-suite-now-back-fashion/
  21. https://www.johndesmond.com/blog/design/a-brief-history-of-the-kitchen/
  22. https://www.homebuilding.co.uk/how-to-renovate-for-profit/
  23. https://south.st/test/
  24. https://www.homebuilding.co.uk/20-sure-ways-to-add-value-to-your-home/
  25. https://www.homebuilding.co.uk/renovation-assessing-the-potential/
  26. https://www.homebuilding.co.uk/diy-what-to-leave-to-the-professionals/
  27. https://www.mirror.co.uk/money/months-work-thousands-spent-added-13191459
  28. https://www.dailymail.co.uk/news/article-6303067/Woman-forced-tear-dream-home-spent-150-000-renovating.html
  29. https://www.which.co.uk/news/2018/08/the-five-home-improvements-most-likely-to-blow-your-budget/
  30.  
 
 

The Full English Accompaniment – New Build Property Warranties

What’s piqued my interest this week?

I learnt this week about another peril of buying a new-build home. One of the reasons people buy a new build is for the ‘peace of mind’ of having a home where everything is new, and if something should go wrong, it’s covered by a warranty. Most warranties are structured to provide ‘defects insurance’ to fix problems which emerge up to three years after the builder leaves site, and ‘structural insurance’, which usually covers from years three to ten (1, 2). The mortgage on your new build notes this, and like all other mortgages expects you to get your own home insurance as well (3, 4).

So what happens when the provider of your new build warranty goes bust? This is exactly what has happened with Alpha Insurance, who were declared in default last May (5). The cover continues to be provided, in some form, by the Danish Guarantee Fund, but that doesn’t help those trying to get a mortgage in the interim like one Reddit user (5, 6). The problem is that most lenders expect a valid new build warranty policy on new properties in order to lend. When the policy provider goes bust this can’t be evidenced. Finding a new provider is apparently a bit of a nightmare. Most policies are provided to large building firms via industrial providers (7, 8). If you’re not a building firm insuring an entire plots worth of houses you have to go to a specialist provider, who are more set up for self-build and one-off builds. These firms are more expensive, often require architects drawings, and may be unwilling to insure or warranty a property that’s already built (9, 10). This leaves the owner either unable to find a mortgage or forced to pay a hefty bill for a warranty that covers thing theirs home insurance already protects.

A niche issue perhaps, but when combined with the number of articles in the news lamenting the shoddy build quality of new homes, I’m sworn off buying a new build. Not a month goes by where articles advise on the merits of snagging surveys, and dubious construction practices (11, 12). Others report on owners issues trying to actually sort snags out, and homebuilding firms putting money aside to repair their own errors (13, 14). As always, do your own research and go in with your eyes open.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (now affiliate links):

Tombland – C.J. Sansom – I love the Shardlake series, detective novels set in the Tudor period with a crippled lead character. Beautifully written.

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/new-home-warranties-cover/
  2. https://www.gocompare.com/home-insurance/new-builds/
  3. https://www.telegraph.co.uk/insurance/home/20-home-insurance-traps-and-how-to-avoid-them/
  4. https://www.citizensadvice.org.uk/consumer/insurance/insurance/types-of-insurance/buildings-insurance/
  5. https://www.fscs.org.uk/what-we-cover/insurance/alpha-insurance-as-declared-bankrupt/
  6. https://www.reddit.com/r/UKPersonalFinance/comments/apglf3/alpha_insurance_default_cannot_remortgage_savings/
  7. https://www.cml.org.uk/consumers/buying-a-home/new-build/
  8. https://www.pbctoday.co.uk/news/building-control-news/all-you-need-to-know-about-structural-warranty/41840/
  9. https://www.fmbinsurance.co.uk/insurance-products/new-homes-insurance-build-assure/
  10. https://c-r-l.com/what-we-cover/structural-insurance/
  11. https://www.which.co.uk/money/mortgages-and-property/new-build-homes/snagging-surveys-apxu15x04s1j
  12. https://www.theguardian.com/money/2019/feb/02/new-build-homes-why-some-owners-are-left-feeling-the-cold
  13. https://www.ftadviser.com/mortgages/2018/05/10/mortgage-lenders-soothe-fears-over-new-build-issues/
  14. https://www.bbc.co.uk/news/business-46302905
  15. https://www.theguardian.com/environment/2019/feb/10/plummeting-insect-numbers-threaten-collapse-of-nature
  16. https://www.propertywire.com/news/uk/falling-house-prices-means-property-investment-is-less-attractive-new-analysis-suggests/
  17. https://www.theguardian.com/society/2019/feb/11/study-links-heavily-processed-foods-to-risk-of-earlier-death
  18. https://www.bbc.co.uk/news/business-47200688
  19. https://www.bbc.co.uk/news/business-47224913
  20. https://www.theguardian.com/environment/2019/feb/12/electric-cars-already-cheaper-own-run-study
  21. https://www.parliament.uk/business/news/2019/february/royal-assent-tenant-fees-bill-signed-into-law/
  22. https://moneyweek.com/501682/pensions-drawdown-disaster/
  23. https://www.theguardian.com/business/2019/feb/14/renewable-energy-world-power-source-bp
  24. http://www.cityam.com/273176/starling-banks-75m-funding-round-merian-global-investors
  25. https://www.bbc.co.uk/news/business-47251465
  26. https://www.theguardian.com/business/2019/feb/08/risk-of-global-recession-may-be-low-but-we-are-heading-for-slowdown
  27. https://www.theguardian.com/business/2019/feb/14/how-can-we-tax-the-footloose-multinationals
  28. https://www.theguardian.com/business/nils-pratley-on-finance/2019/feb/13/interserve-needs-a-plan-b-given-the-rebellion-over-its-current-plan
  29. https://www.fool.co.uk/investing/2019/02/10/thinking-of-investing-in-these-neil-woodford-ftse-250-stocks-read-this-first/
  30. https://www.theguardian.com/politics/2019/feb/09/william-keegan-nine-british-financial-crises-since-1967
  31. https://www.ukvalueinvestor.com/2019/02/ftse-100-dividend-valuation-and-forecast-for-2019.html/
  32. https://gentlemansfamilyfinances.wordpress.com/2019/02/13/how-to-put-out-a-fire-use-liquidity/
  33. https://gentlemansfamilyfinances.wordpress.com/2019/02/12/early-redundancy-lessons-from-lifes-veterans/
  34. https://gentlemansfamilyfinances.wordpress.com/2019/02/15/if-i-lost-everything/
  35. https://thesavingninja.com/if-you-lost-everything/
  36. https://youngfiguy.com/wiped-out/
  37. http://quietlysaving.co.uk/2019/02/15/thought-experiment-2/
  38. https://indeedably.com/restart/
  39. http://ditchthecave.com/fear/
  40. https://firevlondon.com/2019/02/15/ive-lost-everything-through-a-cyber-theft/
  41. https://financeyourfire.com/2019/02/15/thought-experiment-wiped-out/
  42. http://eaglesfeartoperch.blogspot.com/2019/02/calculating-portfolio-returns.html
  43. http://www.mrmoneymustache.com/2019/02/11/hanging-out/
  44. http://diyinvestoruk.blogspot.com/2019/02/my-global-index-funds-under-spotlight.html
  45. https://simplelivingsomerset.wordpress.com/2019/02/14/dutch-brexit-humour-from-outside-the-nuthouse/
  46. https://monevator.com/weekend-reading-29-quick-rules-about-money/
  47. https://indeedably.com/what-you-keep/
  48. https://lovelygreens.com/growing-tomatoes-from-seed/

Property Renovation Lessons I

Gather ye round students.

It’s a peculiarly British fascination that we own our homes. Your home is your castle.

The default setting for those with spare-cash in their middle-years appears to be adding to your castle, working up the property ladder or buy-to-let. Yet it’s a route full of pitfalls, and BTL is fast becoming a mug’s game. MrsShrink and I have been fortuitous in turning a £20k deposit in 2014 into a £52k deposit this year (~38% annual return). We did this by buying a fixer-upper and working our socks off in our spare time. MrsShrink comes from a family of serial renovators, and spent some time learning painting and decorating with a professional family member. I come from building trade stock, and have plied the hod and trowel. I know which end to hold a hammer. So here’s the lessons from along the way that we applied to our second house purchase and renovation.

Location Location Location

  • Buy the worst house on the best street in the best neighbourhood you can afford

Classic Sarah Beeny this one. Waiting for the rough looking house to come up can pay dividends, however there’s plenty of property developers also looking to do this who probably have cash on hand to swoop quickly (1). As an alternative look at what has been on the market a long time, work out why and knock them down for it if it’s overpriced. That unappealing quality avocado bathroom could be £15k off the asking price for a fed-up seller. The primary issue here is that due to Sarah Beeny, DIY SOS, The Renovation Game etc every man and his dog thinks they’re a property developer by ripping out a 30 year old fitted kitchen and banging in a Wickes’ budget MDF job (2). Shame that.

  • Check the location using Rightmove’s school checker, look for local shops and public services like bus stops, libraries, parks etc (3).

This again is partly straightforward. Even if you don’t have kids being in a good school catchment improves resale, although worth bearing in mind that schools can turn around quickly. Less thought about are bus stops; schoolkids yelling outside your house can pretty quickly turn a night shift worker potty. Likewise parks and outdoor sports areas.

  • Check the local streets on your councils planning portal and local area development plan

Is your neighbour about to be converted to an HMO? Is that spot of derelict land at the end of the road turning into a block of flats with no parking allocated. This is exactly what is happening a few streets over from us, and the next-door owner is currently selling up as their current uninterrupted view over the city is due to be replaced by six stories of students. Those planning applications may be the prompt for the sale. Also check your councils local area development plan (or equivalent). This may suggest (as for our current location) there are planned infrastructure, zoning or conservation changes which could dramatically impact the appeal of an area.

  • Check long term floodrisk maps

Published by the government, this shortcuts going through the purchase process only to find on your surveys that your new dream home floods any time we get fair-middling drizzle. For England see here, Wales here, Scotland here (4, 5, 6).

  • Google Streetview is your friend

Check the roof, neighbours gardens for a sense of upkeep of the local area, evidence of building work and other nearby extensions. Four doors up may have a single storey extension that makes getting your planning permission in five years time that much easier. What’s the rear access like? Does Streetview show the rear lane blocked by idle taxi drivers?

  • Check the street at rush hour and mid-evening.

This is a bit involved, hell some people buy houses without seeing them! However if you go to a house viewing at 2pm on a Saturday the quiet tree-lined street with great school access may be a different picture to the school-run mummy-chariot car park. Likewise mid-afternoon could get very different to mid-evening if your excellent local gastropub has less than polite clientele.

Kerb appeal

It’s not just about from this (1):

to this:

Though that first impression counts. If the house looks down at the heel then a clean and a coat of paint may do wonders. Here’s a short list of what else to look for:

  • Doors and windows – wood/ PVC/ aluminium?

Is the wood rotten? Is the PVC discoloured or warped? Is the aluminium corroded? Are the windows double glazed and if so what state are they in? If there is misting inside the windows, like below, it suggests the double glazing has ‘blown’, and is no longer sealed (7). This will still be warmer than single glazing, but lets less light in and obscures your view! Budget at least £500/window for decent replacements (8). Sash windows and wooden casements will cost more, but sash are more desirable and wood will last a lot longer if maintained. On older properties original sash windows can be retrofitted with double-glazing by specialist companies, and this can work out cheaper than having new units made (9). Finally, check the state of the external locks, as many insurance companies will give you better rates for a BS-standard 5 lever deadlock.

  • External walls – clad/ brickwork/ render/ pebble-dash/ stone/ other?

We’ll start with brickwork as in many ways it’s simplest, and most of it also applies to stone. Older and underburnt bricks can suffer from years of frost damage and degrade, a process called spalling, so check for evidence of failure like below (10). Stone will also erode over time (particularly limestone in acid rain, and sandstone mislaid with a vertical grain) (11)

Check for evidence of degradation of the mortar in joints which will require re-pointing (12).

Look for external cracking. In previous centuries lime mortar was used which allowed a degree of flex in the joints due to it’s softness, but as building has moved to stronger and easier concrete/ cement the joints have become inflexible and unyielding. Cracking can have multiple causes but it usually down to building settlement. A degree of settlement is normal over the course of a properties lifetime, and particularly after periods of heavy rain or prolonged drought when the soil underlying the foundations moves. Small cracks are nothing to worry about, but bigger ones may suggest faults with the foundations which can require costly underpinning work. When next to gable walls it may suggest the wall is pulling away from the rest of the house, requiring insertion of wall ties and structural work. If around windows/doors then it may suggest rotting, movement or inadequacy of the sill. If in doubt get a professional survey.

 (13) (14)

Render can have similar issues with cracking as above, but is utilised to offer a layer of protection to the underlying stonework. This was traditionally used where unfinished structural stonework was rougher/ cosmetically poor, or in exposed areas – coastal etc. Breathable lime-based renders were used on older buildings, and replacement with concrete can cause damp issues. Newer buildings have concrete render, which will usually last about 20 years. Certain areas of the country (in my experience Cornwall particularly) have issues with render staining which requires cleaning (15). Budget a couple of thousand pounds, plus VAT and scaffolding costs for a re-render (16, 17).

Pebbledash and roughcast are essentially a different form of render where pebbles are sprayed on or added into the render. It came to be used during the Arts and Crafts Movement, but is often associated with ’20s and ’30s housing where it was used to cover cheap and quick brickwork (structurally sound but not aesthetically pleasing) (18). It offers a greater degree of weather protection than standard render. Don’t write off a pebbledash home. Removal is time-consuming (read expensive), but painting can make a huge difference (16)

Cladding is it’s whole other separate post. Replacing cladding is a good way to bring an out-of-fashion exterior bang up to date. Cladding may require planning permission under permitted development rules, or further consideration in conservation or national park areas (19).

  • Check for cavity wall injection points

Cavity walls, where there is an air gap between the inner and outer skins of the wall, became mainstream in the 1920s (20). The two skins are tied together either with bricks placed perpendicular across them, stones, or now with metal ties. The original usage was to prevent the passage of moisture into the building from outside. Insulation in the cavity became compulsory in the 1990s. In older houses is became common to use an injection method to insert insulation into the pre-existing cavity, leaving behind tell-tale holes where drilled (21). Cavity wall insulation divides opinion. The added insulation can in principal save a fair amount on heating. I dislike retro-fitted cavity wall insulation due to the potential for air and moisture-bridging, especially across damp courses lower down in the wall. This allows moisture to track across where there was previously an air gap, or through osmosis past the damp proof course. In modern houses the damp proof course sits below the insulation as it is inserted during construction, and with the use of modern backed insulation boarding it is less of an issue. Do your own research.

What lies above?

  • Check the roof

I won’t go into different roof materials, again it would be a whole other post. Stand on the other side of the street and look at as many elevations as you can see. Are there any slipped slates/ tiles? Any missing ridge tiles? These can all be sources of leaks if the roof lacks underlay (22). Most tile roofs can last 50 years if maintained, while slates can last a hundred (23). Budget £5000+ for new roof. This could escalate if the underlying joists and rafters are warped, damaged or rotten, indicated by a sagging area of roof. If the whole roof appears bowed under weight then it may be less of a worry; this is usually the result of replacement tiles being heavier than the originals, gradual settlement over time, or the effect of weight following a period of heavy snow (24).

Damaged or degraded flashing is a common cause of a leaky roof. I would bring binoculars to look at the roof when I was viewing a house. Lead is generally used and is very durable, but can fatigue or come loose. More rarely zinc, copper, aluminium or galvanised steel has been used. Budget £1000-1500 as a minimum for remedial work including labour, materials and scaffold (25, 26).

Chimneys… where to even start? Apply all of the brickwork damage section here, particularly spalling. The heat expansion and freeze/thaw effects combine to result in rapid degradation. Check for mortar breakdown around flashing at the base, a common source of ‘falling damp’ which is water leaking down the chimney breast. Check for vertical cracks in the chimney, vegetation, nesting animals, degraded cement caps and loose chimney pots or cowls. All can cause problems (27, 28). We’re currently trying to have our chimney repaired as preventative maintenance, with quotes between £1500-2500. Getting the agreement of our neighbour as it is a party wall has proved troublesome (rented property). We can’t go ahead until we have their agreement, but hopefully they’ll go half.

  • Check the gutters, soffits and fascias

Again a multitude of materials and a cause for ‘falling damp’. Traditionally gutters were cast iron and painted. These with maintenance can last many, many years. For a short period there were asbestos and fibre gutters, before moving over to PVC or plastic forms. These don’t last as long but don’t need the maintenance (and are cheaper).

Firstly, check for vegetation or any signs of blockages in the gutters themselves. This causes rainwater to overflow (a cause of damp), but is easily remedied with a ladder (or if you really fancy get a bloke with a pressure washer). Then check downpipes and ground-level drains (gullys). Are they securely attached and are they all connected. Again a common cause of internal damp is a leaking external downpipe (29). I hired an aluminium scaffold tower for a week for £120 this summer and had a great old time digging years of rotting vegetation and a few carcasses out of our blocked gutters, before rodding out the downpipe and running new ground-level pipes. I also took the opportunity to repaint our soffits and fascias. Cheap fixes and maintenance preventing future problems.

Your guttering will be attached to the fascia, with the soffit covering the underhang (30). These used to be made of wood, which would need to be periodically painted. In more recent years they’ve been replaced with PVC. Sometimes this covers and is fixed to a wood board, or is fixed to the older fascia or soffit. Watch out for where people have covered a rotting old fascia with PVC to hide it, as it will continue to rot and the guttering will fall out.

The hidden costs

  • Check utilities services

What do I mean by this? Check where the stopcock and meter are externally if it’s obvious. Check where phonelines enter the building. Both can be a pain to track down. More importantly – check the drains! Where does the external surface water drain to? Are there obvious access hatches to inspection chambers? Learn from my error, when I spent a wintry December week breaking up our concrete yard and digging down two feet to expose a broken salt-glaze pipe containing 12 foot of backed-up liquid faeces. If you’re planning to rework a property then knowing where the utilities is essential for plumbing planning.

  • Check the garden for Japanese Knotweed & other pests.

Look for the plant below, Japanese Knotweed. The effect on the value of the property is massive. It’s an invasive non-native species which is classed as hazardous waste, and any land containing it is counted as contaminated. It’s difficult to get rid of, spreads like wildfire and grows up to 10cm a day (28). A survey by YouGov and Environet UK estimates that 5% of UK homes have Japanese Knotweed (31). Finding Japanese Knotweed will knock 10% off that value of the property (31, 32, 33). Also take the opportunity to spot for evidence of wasps nests, bats, rats or mice.

Finalement

So that’s outdoors briefly covered. In part two I’ll cover indoors, reflecting on what to look for in your first and second viewings when considering a house, and the mistakes we did and didn’t make.

The Shrink

 

References:

  1. https://www.telegraph.co.uk/property/buy/should-buy-worst-house-best-street-turn-ugly-duckling-swan/
  2. https://www.dailymail.co.uk/news/article-3114485/Want-make-money-property-Buy-house-avocado-bathroom-Artex-ceilings-quadruple-investment.html
  3. https://www.rightmove.co.uk/schools.html
  4. https://flood-map-for-planning.service.gov.uk/
  5. https://naturalresources.wales/evidence-and-data/maps/long-term-flood-risk/?lang=en
  6. https://www.sepa.org.uk/environment/water/flooding
  7. https://www.eygwindows.co.uk/lifestyle-blog/why-does-double-glazing-mist-up
  8. https://www.theecoexperts.co.uk/double-glazing-costs
  9. https://www.renovategreen.co.uk/building-fabric/retrofitting-double-glazing-into-old-windows/
  10. https://www.designingbuildings.co.uk/wiki/Defects_in_brickwork
  11. https://www.heritage-house.org/damp-and-condensation/types-of-damp-what-have-i-got/damp-problems-caused-by-cement-pointing-of-brick-or-stone.html
  12. http://www.loughboroughproperty.com/repointing/
  13. https://www.diydoctor.org.uk/projects/settlement.htm
  14. https://gharpedia.com/diagonal-cracks-brick-walls/
  15. http://www.colinsquire.co.uk/red-stained-walls/
  16. https://www.homebuilding.co.uk/render-faqs/
  17. https://www.thegreenage.co.uk/cost-of-external-render/
  18. https://en.wikipedia.org/wiki/Roughcast
  19. https://www.homebuilding.co.uk/cladding-new-facades-for-ugly-homes
  20. https://en.wikipedia.org/wiki/Cavity_wall
  21. https://www.fixmyroof.co.uk/videos-and-guides/pitched-roof/repair-a-slate-roof/
  22. https://www.roof-stores.co.uk/guides/tiles-and-slates/roofing-tiles-slates-lifespan/
  23. https://www.designingbuildings.co.uk/wiki/Flashing_in_building_construction
  24. https://www.homebuilding.co.uk/roof-repairs/
  25. http://essexroofingandfascias.co.uk/portfolio-items/damaged-chimney/
  26. https://www.karnakcorp.com/roof-conditions/damaged-flashing/
  27. https://www.homebuilding.co.uk/repairing-gutters/
  28. https://www.jjroofingsupplies.co.uk/blog/what-are-soffits-and-fascias/
  29. http://surveyingproperty.blogspot.com/2018/#.XAATl9v7SM8
  30. https://www.independent.co.uk/news/business/news/japanese-knotweed-house-prices-property-value-mortgage-insurance-how-to-treat-a8557971.html
  31. https://www.telegraph.co.uk/property/uk/property-buyers-sue-50000-japanese-knotweed-problem-homeowners/
  32. https://www.moneywise.co.uk/news/2018-09-28/japanese-knotweed-blight-has-slashed-uk-house-prices-20bn

 

 

 

Quarterly Returns Q2 2018 – A Tale of Two Cities

For my first quarterly return, I’ll lay out the basic plan for the future, and then tell a little story of hindsight.

Quarterly return posts will supplement my monthly Financial Dashboard, but with a different focus. While the Financial Dash mainly deals with my day-to-day, week-to-week goals, budgeting, the Quarterly Returns will cover investments in detail and look at my yearly targets. Here I will track purchases and sales, document my investment strategy, and discuss re-balancing and changes over time. Inevitably there will be some overlap, but I’ll try to minimise this.

Eventually the plan is to display some pretty graphs of exposure, increase over time etc. As I’m still developing my spreadsheets, for now I’ll just make a nice list.

Q2 Returns:

  • Cash Savings Accounts £400
  • Investments £0
  • Esoteric tat £3000

Lovely.

Yearly Targets:

Goal 1: Build an emergency fund.

As per the r/UKpersonalfinance flow chart, I’m working towards building an emergency fund (1).

I currently have a month’s outgoings in our joint account, and working towards two months. I’m chipping away at this, but now I have a month’s worth tucked away (and completed some fairly massive life-costs) I’m going to target debts.

Goal 2: Pay off debts

At the start of Q2 my short term debts were £2.5k to family and £4.3k on 0% interest credit cards. These are now £1,250 and £4.1k respectively. The aim is to bring my credit card debt down gradually, but as it’s at 0% for another 2 years I may indulge in some stoozing (2). I can also now close two redundant credit cards now I have no upcoming credit applications.

Goal 3: Reduce superfluous outgoings.

I’ve managed to reduce my living costs (see below), but an area for future work.

Goal 4: Commence investing!

The target for Q3.

A Tale of Two Cities

Inspired by Ermine’s tale of a dumb property purchase, here’s mine (3). This is a story of opportunity cost, the British love affair with owning our own home, and how as a person sometimes buying is not the right thing to do.

As mentioned in my Musing On… Mortgages post, MrsFireShrink and I were lucky enough to purchase our own home in our mid-20s. There are plenty of reports and opinion pieces currently doing the rounds, detailing how a third of my generation “will never own a home”, how it’s a housing crisis and changes must be made to the broken market (4, 5, 6). Wind back to 2014, and those worries are starting to bubble to the surface, but not yet in the public consciousness.

In those heady, pre-Brexit, pre-coalition-of-the-contemptible days house prices are still rising. Property is still a sure thing. We’re over the 2008 wobble, Dave Cameron is in charge and ‘the city’ and financial markets are looking bullish. Every man and his dog is flipping the equity from their own home into a nice little BTL side-hustle, an earner for retirement, inheritance for the children. The market looks nice and rosy, house prices always go up, right…. right? (7):

Enter stage-left MrsShrink (then MissFrugalStrongIndependentWoman) and I. We sat and planned our future together. I was living in work digs, 150 miles from MrsShrink. These were particularly miserable NHS digs, built after the war and updated when things broke, sometimes (for example see below) (8). Lying on my lumpy single bed as snow, rain and hail came through the single-pane aluminium-framed windows (which you couldn’t shut properly) I dreamt of a home to call my own. Heating that wasn’t on flat out, 24/7, even in midsummer. An oven that worked, A gas hob younger than me. A fridge lacking CFCs, etc.

The saving grace of these digs was that they were cheap. Really cheap. 90% of my earnings was paying off accumulated student credit card and overdraft debt, or sitting in our first, joint, savings account. MrsShrink and I knew nothing of investing, and to this day MrsShrink is fearful and does not trust the markets. Our plan saw me moving back to join MrsShrink in the city we had studied in, which we had both fallen in love with.

MrsShrink was equally frugal. She had moved in with a friend who had recently bought and was renovating a small terrace. While it was uninhabitable she was staying at his parents, paying a tiny rent, but not ideal accommodation. 6 months in and she was desperate for her own space.

With a small gift from MrsShrink’s mother we had enough for a deposit. The city we studied in was located in the South. A port city, bombed in WW2 and with high unemployment. Lively, cheap to live in, plenty going on and lots surrounding. Rows of identical, overengineered victorian terraces meant housing was around the national average despite being in the South. Early on we decided we wanted something old, with features, with potential but a manageable project.

The house

We spent six months viewing 20+ houses. We watched perfect houses get snatched up by people outbidding us. We viewed some real shitholes, rotten floorboards and collapsing joists. We stretched a bit and leveraged to 90% LTV on 200k. We planned to be there until we had kids, so fixed for 5 years. In 2014, everyone predicted an interest rate rise.

Eventually we found a place. It was a bad house on a good street, with agents pushing for much more than it was worth. In an area of high demand it had been sat for a year. [Warning sign]. It was vast, full of old features and 10% over budget. It also stank of fags and had some qwalitee 90s additions. Faux plastic panelling and fibreboard partitions anyone? [Warning sign]. The electrics had recently been done (cheaply) as had the central heating (cheaply) [Warning sign].

All this didn’t matter. We were in love with it. We could own this big house on this lovely street, all our own! We’ll renovate it, start a family, make loadsa-cash.

The troubles

We put down an offer for 5% under asking, which was accepted after a bit of haggling. We organised a full structural survey. This showed some damp and rot in the downstairs structure, so we went back to the vendors and knocked another 5% off. We were now on (just) budget. We weren’t fazed by this, every old house needs some work, and for houses where the vendor has been there over 10 years a survey may be the first time anyone looks for problems for a while.

The survey also stated that the walls were covered with thick wallpaper, as were the ceilings, and so the structure was impossible to examine. Fair enough said we. [Error]. As first time buyers we were a quick sale. Besides we were now desperate to be in. We wanted our house. [Error]. We completed within two months.

Walking back into the house for the first time, we were hit by a wall of fag-smell. Didn’t matter, we loved it. We held a party where we provided pizza and equipped all our mates with wallpaper stripping kit. The nicotine/tar ran out of the walls in rivulets. We all got contact high. Once we removed six layers of wallpaper and wood chip (spawn of the devil) the resultant 120-year old plaster was absolutely dead, falling off in chunks.

So it continued. I won’t document it all, but selected lowblows included:

  • Undiscovered rotten joists
  • Woodworm
  • Live bakelite or cloth-wrapped wiring throughout which hadn’t been removed, just run as parallel circuit
  • Replastering throughout as rooms sequentially were found to have collapsing or damaged plaster
  • Drains collapsing, prompting the external stack to back up and digging out 12ft of liquid shit in midwinter
  • Fibreboard dropped ceilings in bedrooms hiding fire damage
  • Asbestos boarding
  • Boiler wired through twist-and-tape off a socket, with no fuse
  • Porch collapsing due to rot hidden behind a fascade

Lots of the work I completed myself. The sleet helping to wash off six month old faeces was a particular joy. We dropped about £15k over three years completely renovating. I hate to think what it would cost in labour, as I did 10+ hours a week on it in addition to my 60 hour work week.

The move

Three years into owning our home I was offered my dream job, one that I didn’t believe would ever happen, working with some of the top people in the world. Snag; it’s 150 miles away in another city. After discussions, I moved to pursue it, with MrsShrink following when she found work. We spent the following six months finishing the house to a high standard travelling the 150 miles at weekends. We never got to appreciate the fruits of our labour.

Facing financial pressure, paying rent and bills on one home and a mortgage and bills on an empty one, we put it on the market. We had to port our mortgage to avoid a hefty 5% early repayment charge. An asking price offer made within a week of listing fell through three months later, days before exchange. Another offer fell through a month later. We finally accepted an offer 10% under asking price six months later. We completed two months after that, exchanging on our new property on the same day.

The moral

Why am I telling this story? Through sweat, tears, blood and new grey hairs we made £15k net profit. About what the house would have gained through local market forces anyway. We have more equity in our new property and gained a lot of experience for the purchase of the current house:

  • Don’t overlook flaws because of love unless you’re willing to pay for them in time, stress or money
  • Don’t assume that a survey finds everything (or is even worth the paper it’s written on)
  • The more layers of cosmetic presentation/ furnishing/ detail in a house, the more it can hide
  • You may not make money on property
  • You can’t tell what tenants are like until you see how they live
  • Market estimates are dung; something is worth what people are willing to pay for it
  • Get paperwork evidence for everything
  • Houses naturally depreciate over time, they fall down if uncared for

Ultimately we learnt the hard way that early in life mobility for work can be a greater asset than equity. The British romanticism of owning our home hamstrung us and tied us to a financial obligation. As young professionals we could have been better served by considering our mobility as an asset. Don’t settle down until you really know you’re going to. There endeth the lesson for 20-somethings.

Reference:

  1. https://www.reddit.com/r/UKPersonalFinance/
  2. https://en.wikipedia.org/wiki/Stoozing
  3. https://simplelivingsomerset.wordpress.com/2014/04/06/when-not-to-buy-a-house-a-cautonary-tale-from-a-quarter-of-a-century-ago/
  4. https://www.moneywise.co.uk/news/2018-02-16/homeownership-among-millennials-plummets
  5. https://www.theguardian.com/money/2018/apr/17/one-in-three-uk-millennials-will-never-own-a-home-report
  6. https://www.theguardian.com/society/2018/apr/28/proportion-home-owners-halves-millennials
  7. https://www.ukvalueinvestor.com/2018/06/uk-shares-uk-property-better-value.html/
  8. http://s0.geograph.org.uk/photos/41/10/411045_a8075d90.jpg

Musing on… Mortgages, what’s your risk tolerance?

I’ve recently been thinking a lot about mortgages, because I’m getting a new one. At the same time I’ve been educating myself about investment risk tolerance (1,2). I’ve done lots of online questionnaire’s to evaluate mine, which broadly show I’m willing to tolerate a lot of risk; I’m youngish, can wait most storms out and have a background in a profession where I have to manage risk daily. I also have the capacity to tolerate that risk; I make a good, secure salary and I won’t be investing money I can’t afford to lose. That’s not the case for my mortgage though, the single last purchase/ cost I’ll probably ever make. A post last week on r/UKPersonalFinance got me thinking:

Stick or twist?

Are you mad Shrink? You need to fix, fix, fix, before the rates go up. Everyone says they will: the BBC (3,4), Newspapers (5,6,7,8), lots of blogs (9,10).

Is what everyone was saying when I was looking last week. Except the rates didn’t go up. We had crappier than anticipated economic results, and the BoE said no (11). It cut it’s growth forecast and interest rates remained on hold at 0.5%.

Well they can’t stay that way!

No, they probably won’t. But they could do, pollsters and pundits have been off before. They said Lehman Brothers, Northern Rock etc were too big to fail. They said Brexit wouldn’t happen. Predicting the future is Mystic Meg’s domain.

Carney  
Mark Carney – will the last one out please turn off the lights.

 

Opportunity cost

Four years ago MrsFIREShrink and I were looking at putting our hard-earned deposit down. As 20-something millenials we were pretty unusual to be in that position. We leveraged a 90% LTV on a do-er-upper in the area we both loved, worked and intended on staying in. In those pre-Brexit, pre-May/Corbyn, pre-economic flatline days everything pointed to fixing for as long as we could. 4.29% fixed for 5 years was the best we could manage. That was ok as when we bought we planned to renovate and stay there for 5-10 years.

Fast-forward four years and we’ve moved 150 miles for job opportunities we couldn’t pass up but never anticipated. Our old house is for sale, and we’re trying to port our mortgage to save paying our eye-watering (5%!) exit fee. We’ve learnt that long fixed rates have their downsides (12). We look at others fixing for 10 years, who have no plans to move, and think about their flexibility (13,14).  Going back to those trackers *affix hindsight glasses* had we selected a three year tracker rather than fixing we would have saved thousands in interest. This time we’ve taken information from a number of different sources, and used online calculators to think about our best financial options (15). Cardinal rule learnt: Always consult multiple sources, references and opinions before purchasing.

Where’s the risk?

Why didn’t we go for a tracker 4 years ago? We wanted to minimise our risk to a rising base rate. Despite being tolerant of risk in work and in cash/ stock investments in the past, I’m not for my housing. I started to think about why, and where the risk lay:

  1. LTV – How much you’re willing (or the bank is) to leverage your cash against future earnings.
  2. Monthly repayment figure – How much you’ll be paying back a month, and if you can afford it.

The two are obviously inextricably linked. Our LTV has improved to 80%, which looks to be optimal for interest rate offers. Risks/ costs worth considering:

  • Under-leverage – borrow less, with LTV 60-80%, and pay less on interest due to better rates and lower value. Buy a smaller property, but risk missing out on the extra equity caused by a potential increase in house prices.
  • Over-leverage – borrow more, with LTV 80-95%, and pay more interest due to higher rates. Buy a larger property, put more money in monthly, so more equity in the long run. Greater exposure if there is a house price falls resulting in more negative equity.

The tolerance for this definitely varies amongst my friends and acquaintances. The common theme amongst blogs I’ve read has been to leverage to your max, 90% at least, as long as you have a good duration (25 years+) of work-life human capital left. This seems to be driven by the view that property remains a good long-term investment option. Monevator does an excellent piece on this, although as it’s 2012 it’s a bit out of date (16). Just look at the long term trends below to get the picture:

house-prices

real-house-prices

Anecdotal evidence; I have a close friend who bought on a 85% LTV five years ago. He bought a property in an up-and-coming commuter belt, and the house value increased by about 25% (good on him). He took this and leveraged at 90% LTV on a thumping great Barratt executive home (le sigh), so in his early-30s is sat in a half-million pound house. He’s willing to tolerate the exposure because it’s their dream home and they intend to stay there 10+ years.

Historic Value

Digging a bit deeper into those trends to understand whether now is a good time to go max-LTV is difficult. The question; Have property prices always been a good investment? Could be a whole separate post in itself, but suffice to say it’s difficult to answer. Most property prior to the post-war housing boom was owned by landlords and rented out (are we heading back that way?). The British obsession with owning your own home is a new one. UK house price index data only reliably starts in the 1950s, but this LSE blog looks at land prices going back to 1892 (which helpfully are no longer published) (17).

Cheshire-fig-1

To unpick this data note that the value of the home is made up of the value of the structure and the value of the land combined. This blog by James Gleeson summarises dis-aggregating house price value (18). From it I take this graph:

test2

So, we see that the value of the structure increased slightly once inflation-adjusted, but residual values, i.e. that value of the land, is the source of most of the increase. This is also visible in the price of undeveloped land. Review the historic trends from the former LSE graph and we see that the increase in value is a modern phenomenon, and the long-term investment strategy of property is not so long term.

Short-term LTV Outlook

Again, another whole post in itself. In 2016 the UK Value Investor reckoned that UK house price forecasts weren’t looking good (19). Two years on and the market, as discussed in recent Full English Accompaniments, looks to be stodgy. Back then, UK Value Investor reckoned that house prices were in a bubble and due a crash. This was based on price to earning ratio data:

UK-house-price-chart-2016-11

From UK Value Investor (19)

Here’s a quick description of what that chart shows:

  • The black line – The average house price in each year
  • The red zone – Where the average house price would have been if houses were historically expensive, i.e. if the PE ratio had been between 5.5 and 6
  • The yellow zone – Where the average house price would have been if houses were at historically average valuations, i.e. if the PE ratio was between 3.8 and 4.5
  • The green zone – Where the average house price would have been if houses were cheap, i.e. if the PE ratio had been between 3 and 3.3″

The whole article is worth a read if you haven’t before. John predicts:

Expected capital gains from UK housing are zero over the next ten years

Which two years on looks pretty fair. His assumptions hold that house prices won’t crash, but will stay relatively flat while wages catch up. Worth considering if you’re buying now expecting a 10-20% increase in the value of your holding. Why waffle about this – it nullifies one of the arguments for a 95% LTV.

2. Monthly Repayment Figure

Back to our original list and the monthly repayment figure. A function of mortgage duration, principal sum and interest rate. I’m not going to go into duration so much, as this appears to be more a personal choice and dependent on how much human capital you have left. Opting to pay a short duration means more/ month, a long duration = less. People modulate their monthly repayment on big houses with high LTVs by going longer on their duration. The risk here is about what % of your earnings you’re going to be spending on your mortgage. Lenders set their affordability calculators on earnings, up to 4.5x, but this has got stricter. There have been concerns that borrowers who were previously approved will now struggle to remortgage due to the affordability rules (20, 21, 22).

The traditional model argues to aim for 35% of your pretax income to go on your mortgage, 45% at a push (23). Dave Ramsey advocates a conservative 25% of take-home (24). UK-wide this is on a downward trend, with Halifax reporting it’s dipped to around 29% in 2017/18, but with massive regional variability (25, 26). This has a complex interplay with affordability and price-earning ratio.

Mortgage Payment as %

4A420BC000000578-0-image-a-1_1521210565456

Bottom line – you don’t want to be paying so much on a mortgage you can’t afford other day to day activities. Money Advice Service and Money Saving Expert have good tools to work this out (15,27). The balance between fixing or tracking affects interest rate. Generally go for a tracker and it’ll be closer to the BoE base rate, go for a fixed rate and you’ll pay some percentage for the choice. Money Saving Expert also includes tools to compare trackers, or calculate if paying out of a fixed rate mortgage could be better value (28). People are fixing to avoid a base rate rise, and there’s various calculators available to help with this too, allowing you to calculate how much extra you would pay (27,29,30). The risk if you don’t fix – the BoE base rate skyrockets and repayments become un-affordable.

Anecdotal evidence; I have a colleague who’s a bit of a flash git. At 28-29, he owns 3 properties (from a standing start) and drives a new LR Discovery (on PCP/ lease). He achieved this by buying a small property straight out of university, sub-letting rooms, using the cash created for a second BTL property, and then leveraging that for a flat. All on about 80% LTVs. He works full time 48 hours a week in the medical profession, then does another 20 hours on top overtime to pay his mortgages. Just thinking about it gives me the collywobbles.

What have I learnt?

My risk tolerance for my mortgage is substantially lower than for investments. Our LTV is now 80%, we’ve opted for a shorter (2 year) fixed rate on our extension while our other fixed rate runs out, and combined these make up 39% of our take-home income. Once burnt, twice shy. We’re hoping to fix next year on the other larger principal, and that rates remain low. This seems likely looking at conditioning paths (31). Even if it rises to the long run UK average of 5-6% we’re comfortable. In face we’ve calculated that we can tolerate up to a 10% BoE base rate and still be ok. Those would be days of property price collapse, repossessions, defaulting and as Ermine over at Simply Living in Somerset teaches us the hooded figure of negative equity (32,33). We’re not at the 15% of the the mid-’80s, and it seems unlikely we will be any time soon, but my tolerance for the chance of losing my home is minimal (34,35). But if you have the stomach and the wallet for it, then maybe a tracker is a decent current option. Ultimately I’ve learnt I’m not willing to gamble my home or my family, and I’m not so gung ho after all.

The Fire Shrink

References:

  1. https://www.forbes.com/sites/mitchelltuchman/2014/03/14/understanding-your-own-investment-risk-tolerance/#7f0edac140f5
  2. https://www.thebalance.com/what-is-risk-tolerance-2466649
  3. http://www.bbc.co.uk/news/business-44055400
  4. http://www.bbc.co.uk/news/business-41831777
  5. https://www.theguardian.com/money/2018/mar/05/mortgages-fixed-rate-loans
  6. https://www.theguardian.com/money/2018/apr/21/mortgage-rate-highest-two-years
  7. https://www.standard.co.uk/news/uk/rush-for-fixed-mortgages-as-bank-of-england-rate-rise-looms-a3816071.html
  8. https://www.thesun.co.uk/money/6120079/interest-rates-could-go-up-twice-this-year-but-how-will-it-affect-you/
  9. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  10. https://mortgageadvisers.which.co.uk/about/blogs/
  11. http://www.bbc.co.uk/news/business-44065472
  12. https://www.ftadviser.com/mortgages/2018/01/18/downsides-to-long-term-mortgage-fixes/
  13. https://www.independent.co.uk/money/mortgages/is-a-10-year-mortgage-deal-a-fix-too-far-10237879.html
  14. https://www.moneyadviceservice.org.uk/blog/how-long-should-you-fix-your-mortgage-for
  15. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator
  16. http://monevator.com/historical-uk-house-prices/
  17. http://blogs.lse.ac.uk/politicsandpolicy/land-prices-the-dog-thats-lost-its-bark/
  18. https://jamesjgleeson.wordpress.com/2017/04/03/historical-housing-and-land-values-in-the-uk/comment-page-1/
  19. https://www.ukvalueinvestor.com/2016/11/uk-house-price-forecast.html/
  20. https://www.theguardian.com/money/2014/apr/12/need-mortgage-new-rules-lenders-check
  21. https://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10787446/How-to-pass-the-new-mortgage-affordability-tests.html
  22. https://www.mortgagestrategy.co.uk/borrowers-lose-tightened-mortgage-affordability/
  23. https://www.moneyunder30.com/percentage-income-mortgage-payments
  24. https://www.moneyunder30.com/dave-ramsey-financial-peace-university-review
  25. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  26. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  27. https://www.moneyadviceservice.org.uk/en/tools/house-buying/mortgage-affordability-calculator
  28. https://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator
  29. https://www.which.co.uk/money/mortgages-and-property/mortgages/getting-a-mortgage/bank-of-england-base-rate-and-your-mortgage-albl35s6phq0
  30. https://www.uswitch.com/mortgages/interest-rate-rise/
  31. http://www.thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html
  32. https://simplelivingsomerset.wordpress.com/2014/04/06/when-not-to-buy-a-house-a-cautonary-tale-from-a-quarter-of-a-century-ago/
  33. https://www.financialsamurai.com/what-if-you-buy-a-home-at-the-top-of-the-market-and-a-recession-hits/
  34. https://www.theguardian.com/business/economics-blog/2014/mar/03/uk-interest-rates-a-brief-history
  35. https://www.theguardian.com/commentisfree/2018/may/10/celebrate-house-prices-falling-britain-property-values

The Full English Accompaniment – The London and BTL Bubble?

What’s piqued my interest this week?

Being an absolute N00B at investment, Monevator’s blog post this week on global prime property investment was fascinating (1). Property investment through trusts or funds have offered solid returns over the past few years, but is something not generally considered by Joe Bloggs on the high street. Nor is dropping a casual million on a prime property in Chelsea (or more likely Brixton these days). A much more common statement in the provinces is the goal to own a couple of properties to let for a bit of income in old age/ on the side. Surrounded by professionals in work I hear this at least once a week, but the landscape is changing (2).

For the past couple of years tax laws commenced in April 2016 have gradually put the squeeze on the buy-to-let portfolios. This has included removing the ‘wear and tear’ allowance, and from this month mortgage interest can no longer be deducted from capital gains for BTL, reducing potential profits (3, 4).

Tougher lending rules from the Bank of England also mean that those buying a BTL with a mortgage will need to provide more stringent evidence that they can afford it (5). Energy efficiency rules have also changed, requiring landlords to ensure their properties meet E rate EPC standards (a challenge for many a draughty converted Victorian pile) (6, 7).

Why does this matter to the wider market? Many of the analyses I’ve read suggest that most landlords with just one or two houses, those with an extra property as a bit of side income or ‘accidental’ landlords, are moving out of the market. Gone are the days of easy cash for a BTL using flipped equity from your main home (8). This hasn’t deterred the professional landlords, indeed most are planning to increase rather than decrease their portfolios.

MrsFIREShrink and I have recently been looking to sell our previous home, and purchase in the new area we have moved to for work. The market here is buoyant, with more buyers than properties, but it seems to buck the trend. Elsewhere property prices are stagnating or at the very least holding their own (9, 10). A good friend who works in property in NW London informs me things there are very bad… very bad indeed.

A trend we have noticed locally whilst viewing properties has been a rise in a dichotomous split. Very few good homeowner residential houses appear to be coming on the market, but there has been a dearth of run-down empty residential houses. These aren’t the untouched since the ’70s care-home-funders (rare), or the probate bargain basement bombsites (also rare). They’re clean, cheaply furnished and fitted, reasonably located and appropriately maintained, often with little in the way of updating to boiler/ insulation/ central heating, and missing original features or flashy new additions. Are these the single-property landlords getting out, we wondered? Are these sales providing a lifeline drip feed of property to an otherwise slow market? Has the Bank of England/ Gov played an absolute blinder by crowing about interest rate rises long enough (with minimal change) to scare out those whose BTL portfolio would creak under pressure, and therefore save a future property crash? Are government economists that good at calculating socioeconomic dynamics?

No individual can predict property price change. Discussing the above with the same friend he told me he was happy about the changes. For too long, says he, property has gone up and up, and people could buy with little fear of loss for those making daft decisions. Now in his words – “it’s a market again”.

Happy weekend!

The FIRE Shrink

Side orders:

http://thefirestarter.co.uk/matched-betting-no-lay-acca-tips-tricks/#more-4243 – Matched Betting side-hustles

https://www.theguardian.com/your-financial-future/2018/mar/22/eight-financial-apps-to-transform-how-you-deal-with-money – useful apps to consider, I’m investigating Mint

https://www.theguardian.com/money/2018/apr/21/renting-property-how-does-it-compare-around-the-world – what it says in the URL

http://quietlysaving.co.uk/2018/04/20/4-years/ – Happy 4th Birthday Quietly Saving!

References:

  1. http://monevator.com/could-global-prime-property-be-the-canary-in-the-goldmine/
  2. http://www.thisismoney.co.uk/money/buytolet/article-5633935/Government-plan-professionalise-buy-let-working.html
  3. https://www.simplybusiness.co.uk/knowledge/articles/2017/09/octobers-new-buy-to-let-regulations-what-you-need-to-know/
  4. https://www.which.co.uk/news/2017/06/12-things-buy-to-let-landlords-need-to-know-in-2017/
  5. https://www.telegraph.co.uk/property/landlord-guide/new-requirements-for-portfolio-landlords/
  6. https://www.rla.org.uk/landlord/guides/minimum-energy-efficiency-standards.shtml
  7. https://www.gov.uk/government/publications/the-private-rented-property-minimum-standard-landlord-guidance-documents
  8. https://www.telegraph.co.uk/tax/news/second-home-buyers-landlords-paid-almost-half-britains-stamp/
  9. https://www.telegraph.co.uk/property/uk/sellers-forced-cut-asking-prices-25k-housing-market-cools/
  10. https://www.telegraph.co.uk/business/2018/04/09/uk-house-prices-gain-ground-market-still-soft/