Madness of Housing

How much should we allocate to housing? - Evaluation with the Financial Independence Timeline Planner

• Buy or rent your way to financial independence - a tricky choice
• Why we rented for so long and why we are now settling down
• Creating an asset allocation plan
• What does this mean to our asset allocation 
•  What would we ultimately like our asset allocation to look like
• What about your dream - have a play with the updated Financial Timeline Planner

Why is housing so expensive?

Your Dream Home? - Maison de Graves, Podensac France

Housing has been touched upon several times on this blog as it is a very emotive subject. Most likely it will be the biggest purchase and decision you will ever have. Just to make it difficult there is almost infinite choice combined with personal circumstances, desires and needs.
French Living – Quelle Difference?
Early Retirement with a Mortgage?
You Can't Take It With You
Maintaining Wealth II - We are all Investors Now  
As for the Tribe our choice has been sitting on the fence saving all these years. Or last rental property
was a three bed terraced house in London paying £1,400 per month for the privilege.
taking the 25 times rule for the value of the property we come to a value of £420,000 ($700,0000)
This house is now selling for £650,000 a 50% premium to the rental income - go figure.
Now a a normal mortgage of 3.5X combined salary £650,000/3.5 = £185,000 annual household income. You need to be in (at least) the top ten percent of earners to afford this in the UK:
Clearly a comfortable Financial Independence in a large city is a costly affair nowadays.

The rule, “thou shalt not spend more than 30% of thy after tax income on housing,” has become impossible for the average person. I think we are becoming a “mac n cheese” nation. If the squeeze continues on the middle and lower classes, I'm afraid we are going to see a revolt of the masses. I'm also afraid that we will see blood in the streets. As a result the safest place to be will be on a small farm away from large populations. - Richard Russel

Should we have spent more than 30% of our net worth on what we considered expensive property - NO

What are we doing?

Our TRiBe decided we needed to live somewhere cheaper (south of France) where we have been renting for the past year whilst we have looked to finally buy. After a lot of searching around we have purchased a renovation project. Here is why:

1. In our early years we moved around with work so buying a home at that time was not appropriate. Stamp duty adds up with multiple purchases.
   The paying off of university and car debt whilst building of savings (for some reason that felt right at the time) were prioritised.
    
2. Renting allowed us to super charge our savings rate due to the following
1. No renovation costs
2. Rent was lower than the interest ONLY payments on a similar mortgage
3. No buildings insurance
4. "Deposit" and "Stamp Duty" invested instead of "Spent"
5. Freedom to rightsize and right locate the property as our family grew in size and jobs changed
   
   High property prices in the city meant than an interest only mortgage on a property was more expensive than renting
    
3. Our goal has been to gain financial independence through living frugally. We now live in an area where it makes sense to buy because of the following:
   
1. Rents are higher than a mortgage
2. Owning the property outright eliminates interest rate issues and rental price increases
3. We do not need or want to be mobile - we are happy where we live and have a very good school for our children
4. We are able to buy some land (and water rights) with the property to grow some of our own food. We have the possibility to raise a small cash crop.
5. It is in a warm climate so heating costs can be brought down through solar installations and good insulation.
6. We are "giving up / diversifying assets" some income generating assets for a "family home" and "overall lower living costs". We believe this makes us more Anti-fragile (See book by Nicolas Taleb)
   We can currently reduce our current living costs through owing our property (at the expense of investment income). We are settling for less income but a more varied asset allocation.

How much should you allocate to housing or just rent?

My takeaway from 37 years without owning a property (admittedly some of those were in diapers) is that you need to really understand what will suit you and your family at that point in TIME.
Just search for asset allocation on the web and you will be told this way or that way is best such as:

Example from MarketWatch

What is REALLY best is being in the right asset at the right time whilst hedging risk.
DIVERSIFY and PRIORITISE/GAMBLE.
If only it was that easy and we knew what The.FuTuRe was up to! Unfortunately we cannot all be a Warren Buffet or a Geroge Soros but what we can do is make sure we are knowledgeable, why we are accumulating it and the associated risks.
A well researched strategy, a good set of rules that you adhere to (such as stop losses and booking gains) and try at all times not to become attached or emotional about investment will go some way to being successful. 

Our asset allocation

Before the purchase of the property

Income Portfolio (29%)   -  Dividend Value Growth Stocks to pay for living costs
Growth Portfolio (9%)     -  High growth hence risky investments
Protect Portfolio (26%)   -  Cash and Commodities
Pensions - Final salary (36%) - Cannot touch until 55 years old (allocation too high)!!!
To put some perspective on this we are living frugally (with 2 kids!) Our current living costs are £1,500 per month (£540 of which is rent). Our estimated living costs after property purchase £1,050 per month (higher costs for insurance of the property and taxes etc.) and we want to reduce this further.
On the flip side we would be better off income wise but worse off diversified by carrying on renting

  After Home Sweet Home purchase

Income Portfolio (24%)   -  Dividend Value Growth Stocks to pay for living costs
Growth Portfolio (2%)     -  High growth hence risky investments
Protect Portfolio (6%)   -  Cash and Commodities
Pensions - Final salary (36%) - Too high and cannot touch!
Property / Miscellaneous stuff (32%) - All cost but significant possibility of capital appreciation
...... The pensions are in the stock market and could be considered part growth and income with some fixed income bonds. Ultimately we are aiming for our investment portfolio to mimic the Permanent Portfolio outlined by Harry Browne - 25% Cash, 25% Bonds, 25% Stocks and 25% Commodities so will be focusing on re-building our cash position after the house is done.

Dream

What would you like to own and when, how do you see The.FuTuRe settled in one place or moving about. Do you want to own a house or your own business..... Will this give you a framework for a goal / challenge and perhaps a straw man plan. These dreams are your long term goal. The are the basis for your final and current personal asset allocation. Work backwards from your goal to work out how to get there.

Click Here to Download the Financial Independence Timeline Planner

Peace, prosperity and happiness
CoNTeNDeR
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