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Laurence's Blog

by admin published Jun 15, 2007 09:25 PM
Musings of an itinerant web developer

Amsterdam

by Laurence Rowe published Feb 15, 2008 11:28 PM

is really rather good.

Dissonance and resolution

by Laurence Rowe published Feb 11, 2008 04:50 PM

Tidying is on hold. The minidisc of Beethoven's Pastoral Symphony is found. How can I do anything but sit and listen? The teasing progression building the desire for resolution.

And all the bloody processes and systems driven from my head.

Relief.

Political despair

by Laurence Rowe published Jan 27, 2008 11:00 PM

The Labour Government is in a deep malaise; the Tories are leading in the polls, but not by anything like enough to win the next election; and the Lib Dems have Vince Cable popping up everywhere, looking competant and speaking sense, quite eclipsing whoever they just elected as a their new leader.

Gordon Brown certainly looks indecisive, with his demand for reports into every issue before taking any decision. Maybe this is no bad thing. Arthur James Balfour, British Prime Minister from 1902 to 1905, once wrote an essay entitled, "A defence of philosophic doubt, being an essay on the foundations of belief." A Google search on "prime minister doubt" brings up Tony Blair's foreward the the Iraq dossier.

A decade of Labour administration has only slowed, not reversed the trend of increasing inequality. Nowhere is this more apparent than in London:

American insurance group Marsh has insisted that 12 contract cleaners employed at its City of London headquarters be suspended from duty, after they held a protest demanding improved pay and conditions. (link)

The cleaners are paid £5.60 an hour. Marsh is part of the MMC group. "For the nine months ended September 30, 2007, consolidated revenue of $8.4 billion increased 7 percent from $7.8 billion in the year-ago period". While minimum wage may be enough to survive fairly easily as a young person in shared accomodation in Manchester, In London it is barely enough to subsist.

While it is probably counter-productive for Government to be too interested in the means of wealth creation, it is vital that it assert itself in the distribution of that wealth. We cannot expect corporations in a market economy to be benificient in their operation. Regulation is necessary to ensure that society is not short changed. People must be paid a living wage. If not we all end up subsidising these corporations through housing benefit and income support.

Over two million workers in Britain stand to lose more than half of any increase in earnings to taxes and reduced benefits. Some 160,000 would keep less than 10p of each extra £1 they earned. (link)

If we are to seriously tackle the inequalities in our society we must tame a tax and benefits system that entrenches inequality and bamboozles benefit claimants in a maze of form filling.

Perhaps it is time for a flat rate of tax, but couple it with a flat rate of benefit and abolish income support and job seekers allowance. Trying to calculate what these rates might be is difficult.

Sir Edmund Hilary

by Laurence Rowe published Jan 13, 2008 08:50 PM

"I met the well-connected, the powerful and the rich; it was tremendously entertaining although I saw little to envy or, indeed, much to admire."

First man to reach the summit of Mount Everest. 1919-2008. (via)

Should I buy a flat?

by Laurence Rowe published Jan 07, 2008 01:20 AM
Despite the gloomy outlook, buying a flat still looks like a good investment to me.

At first glance, it looks bad:

Speaking on BBC One's Breakfast programme, Merryn Somerset Webb, editor of MoneyWeek, said he could not "understand why anybody would get into a buy-to-let investment right now."

"It was a brilliant idea five years ago when the numbers added up. But if you were to invest in the average buy-to-let flat today you would be losing money on a monthly basis because your yield wouldn't be as high as your mortgage payments.

"So there is no compelling investment reason to do it unless you are convinced that property prices are going to go up indefinitely. And we know that they are definitely slowing at the moment and are much more likely to fall than rise over the next few years."
(via this site)

Indeed. But what this analysis misses is the rising cost of rents. Over the past ten years (data from DCLG) rental rates have increased in line with average earnings, 50% in ten years or 4.2% pa. While this has been much lower than the increase in house prices, it also seems much more secure. Land is a positional good. In a city such as London supply is restricted. Even if the Government's target of 3 million new houses is met, I can't see it making much of an impact on the rental market here. With a 100% interest only mortgage, rents will have increased sufficiently in 10 years to cover the repayments.

So lets make some assumptions:

  • This is a buy-to-let property. Though it will be more favourable to calculate this as my home, I can't imagine staying in London forever.
  • Average price of a flat in London: £240,000 (Nationwide, Q4 2007)
  • Average rent in London: £843 (DCLG, 2006) -- these are the latest figures availabe. Though their estimates put London purpose built flats at £241,000 in 2006 and London flats saw a price increase of 15.5% in 2007 according to Nationwide, if anything £843 pcm seems a little low for a £240,000 flat to me.
  • Rental prices increase at 4%
  • Mortgage rate is 6%, on an interest only mortgage.
  • Deposit £20,000
  • Stamp duty £2,400 (1% on homes under £250,000)
  • Other costs are another £2,400
  • Captial gains tax is 18%
  • I could get 5% in a savings account
  • but would pay 40% income tax on any interest earned
  • and on rental income, but after deducting mortgage interest and carrying over the initial losses.
  • Price of the flat increases at 2.6% pa, in line with the RPI average over the past ten years. Nationwide in fact shows a long term trend of 0.7% above RPI.

This seems to show break even after 5 years and a £116,000 profit twenty years down the line.

Even if I pick a 7% rate for savings income / mortgage cost and a 1% pa captial rise (in other words a price fall in real terms), rental income covers mortgage payments in 12 years and the overall account reaches break even 26 years down the line.

This does all rather assume that the era of stupidly high interest rates is buried though. That would though likely lead to higher inflation rates for housing too. Leave that model for another day.

Update: All this assumes a (share of) freehold, which are rarer than hen's teeth. Not sure how to price the decline in value as a leasehold runs out.