So we bought our own (half) home!

Indeed we did. Now that we ‘ve settled down in the new place, I’m happy to announce we bought a 2-bed flat in London 🙂

Not quite there yet...
Not quite there yet…

Long-time readers of this blog may recall my sceptical thoughts on home-buying, and especially in London. I was always in favour of renting and investing the surplus anyway (and still are!). I can already hear angry readers typing “Michael, you hypocrite!” before they get to read another sentence!

And they will be right – from a pure mathematical decision, buying a Zone 2, London home right now is probably not the best investment decision. Depending on who you ask, London properties are down between -2 to -10% in the past 2.5 years. Having a mortgage on a property makes things even worse when prices are dropping. Worse case, you may even end up in negative equity!

A combination of stamp duty changes, tax increases on BTL and Brexit shambles have led to this drop. The other logical explanation is that London properties were just too expensive at 14x times average wages, much higher than the historical 4-5x. So now they mean-revert.

But we are where we are now and the London property future is less rosy compared to its 30-something golden years past of dropping interest rates and government’s quantitative easing asset boosting. That’s my opinion, anyway.

But buying a home is not a pure mathematical decision. It’s influenced by things like children and schools, proximity to family & friends, the feeling of owning your own place, personal tastes, urban vs non-urban debates and a good dose of ego boosts at dinner parties.

You probably know that I like to mostly keep an inner scorecard rather than an outer one. So I could not care less about what people think of my home/location or how I spend my money. But I do care about how my family and I spend our time in the next 5 years of living in London. And because finding good rental properties is a) pretty hard where we live b) expensive for what we need, we thought of giving buying another thought.

The cooling-off period also contributed to our buying decision. It’s just quite easy when buyers have the upper hand and the London frenzy has calmed down. Things become even easier when you’re a no-chain first-time buyer with some cash waiting in the bank!

Although negotiating is not my strong hand, it wasn’t really needed here. The reason being that we bought 50% of a shared-ownership property where the price is non-negotiable. The price is set by a RICS valuation and it cannot change even if the buyer wants to sell cheaper. That’s because the developer who owns some of it (the rental part) is not up for negotiations.

I’ve explained the shared ownership model in detail before.

In short, it’s a way to buy part of a property while paying rent on the other part that you don’t own. Our flat costs £600,000. We own 50% of the flat (£300,000 on a mortgage) and pay £500 rent for the remaining half. It sounds complicated but it’s actually quite simple.

The main advantage is the low deposit (i.e. £5,000) because you only need to mortgage the amount you own. But the low deposit was not the main reason we bought this way. I strongly recommend it for first-time buyers not only as a way to rent much cheaper but also as a way to buy against a dropping market. Sure, you may not participate in the full gains when property prices go up, but you’re not losing much either should prices fall. Plus you can buy the entire property anytime you feel like it.

By the way, prices staying the same for say, 5 years, is the equivalent of the real price dropping by 10% due to a ~2% inflation per year. If everything around you becomes more expensive but your house does not keep up, then you’re losing in real terms.

In short, I think buying a shared-ownership home is the best renting lifehack you can get. You also have the option to buy the entire property whenever you want.

Why we bought a shared-ownership flat

The main reason for buying half a home is that I’m just too afraid to get a huge debt pile. It is very important to learn to recognise good debt from bad debt. Buying a house using debt (mortgage) is a good use of debt since a house is an appreciating asset. Buying a Tesla on a credit card is not.

And although London houses are appreciating assets too, I’m not very comfortable paying £600,000 for a 2-bed flat. It makes me nervous. I want to live well in a nice place and enjoy the benefits of owning a place, but I don’t want to make a huge bet on the London housing market. Not right now, at least. I don’t want to hope that London will do well (or rather hope that it won’t crash miserably). Hope is not a strategy.

Our flat costs £600,000. Had we rented the place, we would have to pay £2,200 in rent per month. Had we bought 100% of the place, the mortgage alone would cost £2,079 at 2.29% interest rate (excluding service charges, bills, council tax etc). But shared-ownership? That’s £900 per month mortgage, £500 rent and £200 service charges. £1600 in total and a much lower deposit!

Of course, there are disadvantages such as the fact you cannot negotiate the buying/selling price and you cannot rent the place out. You also don’t participate in full when the market goes up (or down). But in my view, the pros outweigh the cons. I was also surprised by how quick and efficient the buying process was given how many parties are involved.

In fact, if I could buy a lower share of the flat I would. The rental part is so cheap (1.5-1.8% fee p.a.), that it makes sense to try and get a smaller part of a property while renting the rest. Unless, of course, you want to participate in the housing market in full. Shared-ownership is as if you have a cheap interest-only mortgage with a limited upside/downside.

Considering our plan to achieve financial independence in less than 5 years now, getting a big debt can destabilise our journey.

Owning 1% is no different from owning 99% in terms of property rights, service charges etc. But the shared-ownership scheme has restrictions in place that you must buy the minimum share you can afford. And 50% is our minimum.

Is your home a good investment?

A home is a place where you create memories and paint the walls pink should you want to. It provides the comfort of not having to ask anyone’s permission. It allows you to buy decent furniture and not forcefully move because someone wants you out. You own the goddamn place!

But set the nice family moments aside, is your home a good investment? Personally, I see it as an investment which is very concentrated (single asset, single location) and highly leveraged due to the mortgage. People would never take a loan to invest in the stock market, but they happily do so to buy their home.

I live in London, my job is in London and I’m already making a huge bet on the pound (£) being my main currency by just living here. Admittedly, not a good one lately. Why concentrate my wealth even more by getting a big debt on top of that?

But I hear rent is dead money and you’d need to live somewhere anyway! But if rent is dead money, so is interest payments. And buying/selling costs, and stamp duty and ongoing maintenance, furnishing etc. My boiler nightmare came true 2 days after moving in. We paid £350 for an electrician after the heating stopped working due to a leak! Not to mention the opportunity cost of locking a big chunk of your net worth into a house. Which you could otherwise deploy elsewhere.

One of the very first posts on Foxy Monkey was about the pros and cons of buying. At the time, 2.5 years ago, we decided to keep renting instead. As it turns out, it was the right decision from the financial point of view given our money grew nicely thanks to our passive income investments. You can read about it here:

We can go on and on about why your home is not an investment and the concentrated risk you’re taking for risking most of your life savings in a single location, single asset class. But it would be pointless to try to convince Londoners that their home is not a good investment.

Average house price, by English region, Jan 2005 to May 2019. ONS house price index

The average London property now stands at £457,000 as the latest ONS house price index (May 19) reports. A £200k London property bought 20 years ago could now sell for £500,000! The million-dollar question is, are you willing to bet the same will hold true moving forward?

Again, I don’t see my home as the best investment. But I see the value of owning your own home, with a potential financial upside too!

Would we be better off not buying and investing the surplus? Probably. Another option would be to move farther out which would drop the cost of buying by at least 20%. Isn’t this what people do when they have kids? And not pay a crazy £600k for a nice flat with a gym, concierge, gardens and other fancy ‘facilities’ next to the tube. But we like central and we like our current area. We have a community and meaningful friends here and prefer to stay.

Not everything in life is about maximizing the FIRE pot. It’s about the journey of getting there too. Arguably, the most important part which is being travelled in the prime years of your life.

If you’re contemplating buying over renting, it’s worth giving shared ownership a shot. Take it easy 😉

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6 thoughts on “So we bought our own (half) home!”

  1. There is something mighty reassuring about having your own castle / 2 bed flat that transcends investing & all it entails. Congrats, don’t worry about opportunity costs and enjoy your new home 🙂

    • Indeed, Andrew! The way my mind is wired I’ll find it hard not to think of the economics from time to time, but yeah I get what you mean. Thanks, great comment 🙂

  2. Michael, congrats on your property purchase! Good to see you taking further steps toward FI. I am exactly where you are on the issue of owning home Vs renting and I am currently considering shared ownership as well. However, I am not completely clear on the rationale of purchasing 50% vs lower share of the property. It’s a major decision that can’t be taken easily in the current economics climate in UK and the probability of an incoming (maybe global) recession. What’s your take on that?

    • Thanks, Atanas. The reason behind purchasing a lower share of the property is to minimize the risk of owning a very large debt on, what is, a very expensive asset for my taste. Not only I take a large position on the GBP as a currency, but I also buy at the peak of the London market, notwithstanding Brexit.

      The global recession will arrive at some point, but the question is when. No one can really time it.

      • I agree completely, large expose to UK is risky at the moment. I aim for 25% shared ownership, however, there seems to be a shortage of good properties atm.
        Do I understand correctly, that in case of slump in the property prices, one could straicase its stake in the property at the current RICS valuation? That would entail a new mortgage, possibly with lower interest rate, if we assume that the interest rates will be slashed in case of an economic downturn.
        How long did it take to finalise the sale? I assume it takes the same amount of time as a normal property purchase.
        Thanks
        Atanas

        • In case your property declines in value, you can purchase more of it at the lower price, which is actually not a bad idea if you intend to live there long-term. It also averages out the price if you bought at an all-time high so psychologically it’s better too.

          It took us about 2 months to complete which is about average. I think the key thing is to have a decent estate agent who will really chase people up and make sure everyone does their job. That was so helpful in our case.

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Hi! I’m Michael and I love writing about different ways to earn, save and invest our money. Coffee addict :)

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