Max Flint: Anecdotally though, a lot of people will tell you they’ve made a lot of money on their houses.
Ray Wright: Well I think a lot of people have. Of course, the money’s never made until you sell and cash in, which people are finding now, but I don’t think it’ll be as much as they imagine and, again, people typically take into account just headline benefits. They’ll say what they bought at years ago and what they can sell for now, they don’t take into account any of the costs involved in maintaining the house over a number of years or the costs of buying and the costs of selling.
The Royal Institute of Chartered Surveyors, for example, argue quite coherently that people should put aside costs of about 1% a year of the capital value of the house to maintain it properly, and it's cumulative so if you haven't spent it you lose out in the resale or you have to spend it to bring the house up to scratch. So people don’t take into account all the true costs, but nevertheless people do make gains, there’s no dispute about that, but people also make gains renting.
Rental is risk-free. There’s no benefit of capital gain, but equally there’s no risk of capital loss so you know exactly where you stand. At the end of each month you’ve paid your rental, you cannot be any better off or any worse off.
With buying, there are risks and people just don’t take those into account. A bank will very rarely lend to a business more than about 50% or 60% of what they need, and yet with the retail mortgage, with young people who really shouldn’t be undertaking the risk, they’ll lend 100% gearing which is high risk, which is why banks don’t lend 100% to businesses. But they will to mortgagees.
Max Flint: It's very strange, it's very odd.
Ray Wright: It is odd and you could argue, frankly, that it's a bit irresponsible, and it's something I think I would like to see people like the FSA take more interest in. Because everybody knows, certainly in the financial sphere, that 100% gearing is maximum risk and we're putting maximum risk on some of the starter home people who are least able to bear that risk and are now suffering very badly from it.
Young people today, in particular, haven't really grasped the high costs of borrowing in times of low inflation. Most of them are leaning towards the experience of their parents, my generation, who bought at times of high inflation when the debt was eroded very quickly and made very good gains because of high inflation. That’s not the case now, and the cost I think for future buyers will be much more substantial in real terms than they imagine.
It's a very common urban myth, if I may say so, throwing the money away because it's not. A £450,000 mortgage would cost you £39,000 a year. So, in effect, I’ve got a £900,000 flat for £450,000 mortgage and I’ve got all my money free to invest in other places.
Max Flint: But at the end of that time, you don’t have anything to show for it.
Ray Wright: I have no capital gain here but I have capital gain on the money being used elsewhere, which for me is far more flexible than locking it into a property. And property can be very illiquid, as people know now.
I think people should think outside the usual knee-jerk reaction. I think younger people would be a lot better off renting rather than buying for a longer period of time and not worrying about the status and getting on the ladder. I think older people, in my view, would be much better off downsizing to somewhere to rent and saving a lot of their capital.
Max Flint: I think my mum and dad would freak out at the idea of selling up their house that they’ve paid their mortgage off and then going into rented accommodation.
Ray Wright: But the reality is if you sell your £500,000 house, £500,000 in a bank will rent you effectively a £1m house which you can easily pay for from your bank deposit interest and still have spare cash, and it gives you all the flexibility you might need later in life.
Max Flint: You’ve also saved money on picture hooks. You haven't got any pictures.
Ray Wright: That’s true. Well that’s one of the drawbacks of renting. I do have some nice pictures but you put them up and you make teeny holes in the wall and then they repaint the flat at your expense when you go, and now that I'm still not sure how long I'm going to be living in England I haven't yet put the pictures up.
Max Flint: It’d be nice to have pictures though. Isn't that something that you miss with a rented place rather than your own house is your own pictures?
Ray Wright: I think that’s absolutely right. I think that’s one of the drawbacks to renting, especially the short termism of English renting.
It would be nice if any government had a joined-up strategy on housing. I mean we’re never going to solve the housing problems in the UK, whether it's boom or bust, until we have a better balance between the number of housing units available and the demand for those housing units. We don’t have that now, we haven't had it probably since the Second World War, so that causes massive short-term localised distortions.
Well I personally think one of the solutions is to do what they do more on the continent, which is allow companies to give tax breaks to people like insurance companies and other funds who hold large funds to finance build-to-let.
There are plenty of funds in the UK, insurance companies and their pension funds spring to mind, who are looking for long-term steady yields and there’s nothing better than a rental for a long-term steady yield and hopefully the prospect of some capital gain, and build-to-rent is a perfect example of that.
This video extra is in association with Credit Crash Britain: Property - End of the Affair.