Tuesday, April 22, 1997
Bricks and
Mortar:
Just how Safe is
Safe?
by
[email protected]
Britain is a nation of home owners or aspiring home owners. Unlike many of our European neighbours, where even well-off families will be happy to live lifelong in rented accommodation, we in Britain are not content until there's some small part of these overcrowded islands we can call our own.
Margaret Thatcher had a lot to do with it, of course, as she had with many things. In her quest to create a home-owning, share-owning democracy, she tapped into this primeval territorial need and in the eighties made it possible for people to buy the low-cost housing they were renting from the government for far below market value. Later in the eighties an overheated economy resulted in a property boom reminiscent of the Dutch Tulipomania of the seventeenth century when single tulip bulbs were being exchanged for entire farms. As in Holland, the predictable happened; the bottom fell out of the market and since then Britain's economic consciousness has been smarting under the "negative equity" debacle.
Fueled by the prospects of doubling their investments within two years or even less, people had started going just a little bit crazy. Even better was the idea that with just a small down-payment and a huge mortgage you could exponentially increase your returns. After all, you have to have somewhere to live and what could be safer than bricks and mortar? What could be safer indeed? Stocks, perhaps?
The British people thought they were buying houses, but actually they were buying highly geared investment vehicles and they were about to learn that although these might make you a lot of money, they can also lose you more, far more, than you put in in the first place. When the crash finally came, home repossessions soared and those who could afford to keep paying their mortgages at the huge interest rates then prevailing found themselves unable to sell without taking a large capital loss. As a result, the market stagnated and is only now, six or seven years later, starting to recover.
Meanwhile, the stock markets in the USA and the UK continued their rise upward. Over the long-term, in both the UK and USA, property has far under-performed equities as an investment, but still a property is regarded as a vital investment for anyone starting out on their journey through life. "Must get your foot on the ladder," comes the advice, "or else you'll get left behind!"
There are many reasons to buy a place to live, not least because you want to, but I'm not so sure it should be the linchpin of an investment strategy and as we've seen, it's not necessarily all that safe. Once you have paid off the mortgage in 25 years, you'll own the bricks and mortar and in that respect your investment will be secure, even if your money would have done far better elsewhere. But if the stock market fails such that the Dow blue chips lose their entire value, you'd better be an NRA member with a hefty armoury, because you'll be needing it to keep all those bitterly disillusioned, desperate, hungry Fools from the door. A collapse of that magnitude could well result in widespread anarchy as the economic foundations on which Western society is based disintegrate. How safe would your house feel then? Frankly, if you're wrestling with that kind of apocalyptic vision, you might do better to buy gold... and keep it well hidden.
Those of us with a stronger faith in the Big Picture in the UK can now benefit from a type of mortgage which allows us to combine interest-only payments with regular savings into a tax-free stock market account. This means Beating the Footsie can finance the house purchase. So, while you have the freedom to knock down internal walls and put up picture hooks at will, you're using the stock market to build up the capital. And finally, why pay back the capital at all after 25 years? A mortgage is the cheapest form of long-term loan, so why not continue to pay interest at 8% or 10%, while leaving your money to compound in the cheapest high yielders at 16%, 18%, even 20%?
Feeling comfortable with a strategy like this does ultimately depend on how much you believe in the stock market as part of the economic bedrock of our society, but I know how I intend to pay off my mortgage -- posthumously!
Foolish in Devon,
David Berger
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