Saturday 19 October 2013

No Record High for UK House Prices, says RIT

UK house prices rose to a new high in August, according to the Office for National Statistics (ONS)” reports the BBC.  “House prices in August were 3.8 per cent higher than the previous year at £247,000 - topping the previous all-time high recorded in January 2008, according to the Office for National Statistics” reports The Telegraph.  “Average house prices in the UK leapt to a record high of almost £250,000 during the summer” reports The Times.  Sometimes I really do despair.  Is there no decent journalism left in this great country of ours?  Before we even get into this posts content let’s be clear.  A new house price high has not been hit.  The last high was back in 2007 and we are nowhere near that today.  Let’s now run the numbers to prove it.

Firstly it’s important to understand that there are a multitude of UK House Price Indices out there with every one of them measuring something different.  I track five of them:

  • The Rightmove House Price Index.  It calculates its house price by simply taking the Arithmetic Mean or Average asking price of properties as they come onto the market.  This means it will be affected by price changes, if the mix of house type changes and if the mix of location changes for houses coming onto the market.  It is not seasonally adjusted and covers properties from England and Wales.  So this index really doesn’t track house prices as no purchase is required for it to appear within the index making it pretty much worthless.  I only use it as a possible leading indicator (see below).
  • The Acadametrics House Price Index.  This index uses the Land Registry dataset but in a different way.  It calculates its house price by taking the Arithmetic Mean or Average of bought prices.  It then mix adjusts the data to take a constant proportion of property types, from a constant mix of geographic areas.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  
  • The Halifax House Price Index.  This index is based on buying prices of houses where loan approvals are agreed by Halifax Bank of Scotland.  It uses hedonic regression to remove type and mix variations thereby measuring the price of a standardised house.  I use the non seasonally adjusted dataset and it covers the complete United Kingdom.  
  • The Nationwide House Price Index.  This index is very similar to that of the Halifax except it is based on buying prices of houses where loan approvals are agreed by Nationwide.  
  • The Land Registry House Price Index.  This index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  

To use these indices we must also remember there is a timing shift between the indices.  Firstly, a house is placed on the market for the first time (the Rightmove Index).  Secondly, somebody possibly buys the house using a mortgage (the Nationwide and Halifax Index).  Finally, the purchase is registered with the Land Registry (the Land Registry and Academetrics).  The best estimate of this timing shift is shown in the chart within the paper by Robert Wood entitled A Comparison of UK Residential House Price Indices.

Let’s apply this timing shift, place all of the indices onto a chart and look at what we have.

House Prices according to Rightmove, Nationwide, Halifax, Land Registry and Academetrics
Click to enlarge  

The Nationwide, Halifax and Academetrics, while showing a recent uptick, are all nowhere near record highs.  The Rightmove Index suggests a record high was reached in August and Academetrics shows we have just seen one.  The argument is flawed though because all of these indices are measured in a currency which is being continually devalued through inflation and so is not a constant.  Let’s therefore correct for that and have another look.

Real House Prices according to Rightmove, Nationwide, Halifax, Land Registry and Academetrics
Click to enlarge  

That looks pretty compelling to me.  UK House Prices are nowhere near a new high.

Tuesday 15 October 2013

Using a Credit Card to Save Hard (+ UK Average Weekly Earnings)

The Office for National Statistics reports that the Average (Gross, before tax) Weekly Earnings of those that choose to work in this great country of ours is rising by 0.6% per annum.  David Cameron might even spin this into a demonstration that Strivers are starting to get ahead but we have plenty of more work to do if we are to lock in the recovery.  Of course nothing is further from the truth as while that increase has taken place our “strivers” purchasing power has been reduced by 3.1% through inflation (RPI).  This means that on the average all those “strivers” out there have actually taken a gross pay cut of 2.5%.

This is not a new phenomenon.  Real (post inflation)Gross Earnings have been falling for a number of years now.  This can be seen in the chart below which takes the average weekly earnings, multiplies these earnings by 52 weeks to get an annual figure and then corrects for currency devaluation caused by inflation.

Index of UK Whole Economy Average Weekly Earnings Corrected for the Retail Prices Index (RPI)
Click to enlarge

If you’re a “striver” you’re probably thinking this all looks a little bad but it’s actually worse than this.  We all know our politicians continually like to make promises they (we?) can’t afford and love to waste our money on pet follies but don’t like to tell us what that all really costs.  So to hide some of the cost they use that inflation to their advantage by combining it with our Progressive Tax system and Fiscal Drag to tax us more without having to even tell us.

Let’s demonstrate with an example.  Our average “striver” was earning a gross £471 per week and was then given that 0.6% annual increase taking his earnings to £474 per week.  Using a PAYE Tax Calculator we can see our “striver” has seen his net (after tax and national insurance) earnings rise from £374.47 to £376.51.  So as far as the “striver” is concerned it’s not an increase of 0.6% at all but actually 0.5%.  After correcting for inflation the pay cut is then actually 2.6%.

Sunday 13 October 2013

A Retirement Investing Today Review 9 Months into 2013

This is the regular quarterly feature that demonstrates the progress a person living the tools and techniques that this site details can make towards early financial independence.  It is important to note that unlike many books or other websites out there this feature is not a simulation or model.  It is my life so you can say I have plenty of skin in the game and a big incentive to get it right.

This site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.


I am now into a sixth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  The game is all about finding ways to Earn More and Spend Less with the difference between the two being the Save Hard that can be put to work within my investment portfolio.

During my first few years it was all about getting to that 60% savings rate but having achieved it the real challenge now is to stay there.  It really is starting to become difficult to maintain that savings position.  The main reason for this is that I measure my savings rate against gross income and I'm a 40% taxpayer.  This means that if I get a pay rise to even partially compensate for inflation I have to save all of it to keep to the 60% savings rate.  This is because of the stealth tax practised in this country known as fiscal drag which doesn't up rate tax brackets with inflation.  I therefore have to continually find ways to offset 100% of the inevitable inflation in my spending which given the current economic climate I'm sure you will agree is difficult.  Let me give just 2 simple examples, which I’ll likely expand on in subsequent posts:

  • This week we've had the announcement that SSE is to raise gas and electricity prices by 8.2%.  Last year I only used my central heating for about 4 hours so I have already minimised the elephant in the room for most people.  On top of that I still need to cook meals as it’s cheaper than eating out plus have the lights on when it’s dark but already use energy efficient bulbs (and only have the light on in the room that I am using).  Where do I go next?  Note I have a vested interest here as energy price rises hurt me but I own SSE in my HYP so I also want them to maximise profits.
  • To maximise both my better half and my savings I choose to commute a long distance to work which means I burn quite a lot of fuel and we all know fuel prices are rising.  I'm already using a fuel efficient car and always ensure tyres are correctly inflated, I'm carrying no excess weight plus have developed a very light right foot combined with the ability to coast rather than brake.  Where do I go next?  Here I actually have some ideas.  They seem to be working but I want to ensure they are sustainable before I post about them.  

Year to date my savings rate is still above target at 61%.  This might sound like I'm meeting target but I see trouble ahead given that in quarter 1 the rate was 67% and in half 1 it had slipped to 64%.  The problems are all coming from my good friends HMRC.  As I detailed 3 months ago HMRC made a large mistake which resulted in an underpayment of tax which they are now collecting but having now just lodged my tax Self Assessment I can see there is further trouble ahead.  This is coming from the fact that my net wealth is now a not inconsiderable sum with 32% of it not being tax efficiently invested (not in a SIPP, ISA or NS&I Index Linked Savings Certificate).  This means my annual tax bill on those investments is also now not inconsiderable.  By the time the underpayment is recovered and I've paid tax on those investments I can easily see my savings rate falling into the low 50%’s by year end.

Saving hard 9 months in score: Conceded Pass. Ok for now but definite trouble ahead.

Saturday 5 October 2013

Give Me the Dividends Mr CEO (Valuing the Australian Stock Market)

As a stock market investor there are only 2 ways for your wealth will grow – share price appreciation and the reinvestment of dividends which are also hopefully appreciating on a per share basis.  How do CEO’s achieve this share and dividend per share appreciation for us?  I see two distinct methods.  The first is what I like to see and includes:

  • funding of focused and targeted R&D to generate new products with unique selling points when compared to the competition allowing market share gain;
  • looking for new white spaces in the global market where products can be sold; and
  • tirelessly working to find operational efficiencies which increase profitability for a given amount of earnings, to name but three.

The second method I'm not so keen on and includes:

  • the merger and acquisition (M&A) of companies that supposedly have “synergies”.  Sure, some acquisitions work resulting in 1+1=3 but “study after study” also “puts the failure rate of mergers and acquisitions somewhere between 70% and 90%”.
  • share buy backs.  Maybe I'm being cynical here but why do I believe CEO’s undertake share buy backs?  I believe it’s to boost Earnings per Share and the Share Price.  Now why would they want to boost those?  A lot of Executive bonuses are based improving metrics such as these including straight up cash incentives but more stealthily through incentives like share options.

What would I prefer to see from CEO’s?  If they are out of ideas on how to grow the top and bottom lines organically then give the profits back to me in the form of dividends.  Unlike the CEO I can then reinvest those dividends across the whole market if trackers are my thing or a completely different sector if I think that one is overvalued in any world location.  This gives me an advantage over the CEO who only has his/her own company or “synergistic” companies to choose from.

Give Me the Dividends Mr CEO

It’s not a perfect science, because issues like company and shareholder taxation get in the way which/do cause forced behaviours/distortions, but if we look at the ratio of dividend yield to earnings yield we might be able to get some idea of which countries CEO’s are trusting the shareholder and which are having delusions of grandeur and trying to line their own pockets.  Today the S&P500 has a dividend yield of 2.0% and an earnings yield of 5.7% for a ratio of 0.35 meaning US CEO’s are only giving the owners of their company’s 35% of company earnings.  In contrast the FTSE100 is offering a dividend yield of 3.6% (80% more than the US) and an earnings yield of 6.7% for a ratio of 0.54.  So FTSE100 CEO’s are giving back 54% of earnings.  Now let’s jump to another developed country with a relatively small population – Australia.  The ASX200 today has a dividend yield of 4.3% (19% more than the UK and 115% more than the US) and an earnings yield of 5.6% (pretty much identical to the US) for a ratio of 0.77 or 77% of earnings being returned to shareholders.  A visual representation of this can be seen in the chart below.

Chart of S&P500, ASX200 and FTSE100 Dividend and Earnings Yields
Click to enlarge

This method doesn’t claim to be perfect and I could write a page of caveats as to why but it does give some food for thought and further analysis.  One of which is that the reason the return to shareholders is so large in Australia is because Earnings are falling while CEO’s naively maintain (or increase) dividend payments.  Let’s therefore step away from the method and analyse whether the Australian Share Market is good value.

Sunday 8 September 2013

Do Retained Earnings find their way to the Shareholders via Share Price Growth

Running this site brings a number of benefits.  To continually provide original content it forces me to continuously research beyond that of the mainstream media, which I find generally contains a lot of vested interests.  It also keeps me accountable to my original Retirement Investing Today philosophy.  If I can’t walk the Save Hard and Invest Wisely for Early Retirement line then how can I expect others to consider following my footsteps, after having done their own research, when I’m not living what I preach.  Yet so often amongst the world of “experts” we see just that.

Let me give a very simple example.  I’m generally a fan of The Motley Fool, particularly the forums, however take some time to read These Savvy Investors Have Just Hit The Jackpot which I thought would be relevant given I added Vodafone to my HYP back in December 2012.  Besides the article being full of errors it was the last sentence that really did it for me – “Maynard does not own any share mentioned in this article.  The Motley Fool has recommended shares in Vodafone and GlaxoSmithKline”.  So somebody is prepared to write an article about how great something is but isn’t prepared to put any of his own skin in the game.  That’s certainly not how this site works.

The negative of my approach is that you the reader generally only ever see one viewpoint, which is my life.  Of course the much valued Comments provide different viewpoints which benefit everyone but I also get an additional benefit, email from readers, which is what today’s post is all about.  A couple of weeks back I received a well thought out email which used some of the regular data that I publish on this site but which was used to answer a different question to that which we usually look at.  Some of the conclusions were also slightly contrarian.  After some email banter that reader has generously allowed me to publish that email.  I hope you enjoy the different viewpoint.   

Dear RIT

The big question - Do retained earnings find their way to the shareholders via share price growth?

After a lucky run in business I retired 5 years ago aged 40.  As only a third of my portfolio earnings are paid out as a dividend I have been searching for an answer to this big question.
I came across your FTSE 100 Cyclically Adjusted Price Earnings Ratio (FTSE 100 CAPE) Update post and I'm certain the answer is in there but you need to look at the data slightly differently. Please stay with me as you will love the outcome.