Case-ish Study, HCOL, Good Savings Rate, Right Plan?

[TakeStock]

Our current situation is as follows;

UK Expat Family of 3 (7month old) living and working in Singapore, our earnings are good (SGD 600k), taxes reasonably low (17%) but cost of living is high.

That being said we are managing to save significantly, 30% to 60% on any given month.  My monthly earnings can vary due to commission and bonus payments. 

Current net worth is as follows;
   
proceeds from house sale   £87,000.00 (expected in September)
Investments - £187,543.00 (Index funds and Bonds 80:20 VUKE, VWRD and IGLS)
Shares   £56,901.94 (small cap O+G and Biotech)
Cash   £300,000 (this is earmarked for a house purchase)
Retirement Account (SIPP) £49,357.00
   
Current Net Worth   £680,801.   

I have in the past learnt the hard way on small cap stocks, Oil and Gas in particular, losing £115k! I now, simply invest in Index funds one UK, one global and a bond fund - re-balancing once per year. 

Our simple plan is to continue to fund our investment account as much as possible - aiming for £1.5m and a 4% withdrawal rate at FIRE. 

We will return to the UK in the next 2-5 years - so our saving rate in absolute £ terms will reduce owing to higher taxes and potentially lower wages, but should still be 40%+ of earnings.

The big conundrum we have is how much to spend on a house which we intend to buy in 6 months time.  We can comfortably put down a deposit of £350 to £400k and borrow £500,000.  At current interest rates, sub 2% is very achievable and working in Singapore for next 18-24 months we can save £150k+ to pay down the mortgage or invest. 

Property in the UK is relatively expensive, if we buy a house at a much lower value than we can afford we potentially price ourselves out of moving to more expensive areas (south) in the future if we need to for work or family reasons. This of course assumes a general uptrend in property prices over the long term.

Our conundrum is whether to spend £800-£900k+ on a house whilst debt is cheap or buy something much cheaper say £500k and invest aggressively? 

In the UK any gains on your primary residence are not subject to tax, so the old adage has been buy the most expensive (best value) house you can afford and let inflation work its magic over time on the debt and capital appreciation on the house over the long term 15-20yrs+. 
In either case, we will pay down the mortgage aggressively over the next 5 years.   
 

[PapaBear]

Our current situation is as follows;

UK Expat Family of 3 (7month old) living and working in Singapore, our earnings are good (SGD 600k), taxes reasonably low (17%) but cost of living is high.
[...]
We will return to the UK in the next 2-5 years - so our saving rate in absolute £ terms will reduce owing to higher taxes and potentially lower wages, but should still be 40%+ of earnings.

The big conundrum we have is how much to spend on a house which we intend to buy in 6 months time.  We can comfortably put down a deposit of £350 to £400k and borrow £500,000.  At current interest rates, sub 2% is very achievable and working in Singapore for next 18-24 months we can save £150k+ to pay down the mortgage or invest. 

Property in the UK is relatively expensive, if we buy a house at a much lower value than we can afford we potentially price ourselves out of moving to more expensive areas (south) in the future if we need to for work or family reasons. This of course assumes a general uptrend in property prices over the long term.

Our conundrum is whether to spend £800-£900k+ on a house whilst debt is cheap or buy something much cheaper say £500k and invest aggressively? 

So let me recap this quickly, just to make sure that I got all the facts straight:
- You currently live in Singapore and intend to stay there for the next 2-5 years
- As an expat in Singapore, you most likely rent or have employer-sponsored accommodation
- You want to buy a house for future personal use in the UK and wonder how much it should be

Why would you want to buy any house in the UK right now? I am making assumptions now, but I hope that my point gets across:
- You don't need the house in the UK right now to live in
- You could turn it to a rental in the meantime, but you most likely would need a local property manager - if not, your house would have exactly 0% return (not factoring in potential appreciation in book value)
- Location choice might be difficult since you don't know what the future brings and some locations might limit your options after your return from Singapore

To be honest, I would just wait to buy your house until you are back from Singapore and know what exactly you need. Most likely, passive index investment will be a better and more liquid way of investing in the mean time. If you are very positive towards the UK housing market, you can add REITs to your portfolio, but you don't need to make a choice as big as your location choice and house purchase right now.

I guess this whole train of thought is somewhat connected to the fear that interest rates may rise soon and house prices continue to increase.
Isn't that somehow an attempt to time the market? While it could be possible that house prices continue to increase it could be also possible that a second housing bubble bursts and prices are falling again. Or that the economy does not evolve as predicted and the central banks keep the interest rates low.

Another way to think about this situation could be the differentiation between consumption spending and investment.
Would you buy a car in the UK now and park it in your garage and leave it untouched for the next 2-5 years? Most likely not, no matter what the interest rates and car prices are right now. In my opinion, buying a property for personal use is quite similar to the car purchase (=consumption), since you don't get any investment return. The only return you have is not spending rent and a potential increase in the value 10 or 15 years down the road. These increases in value could also be offset by required updates or repairs.

If you are dead serious about buying a house, you could think about forward loans or other, similar financial instruments to lock in today's interest rates for the mortgage. This would at least eliminate the rising interest rate part of your equation. While these financial instruments might have a carrying fee, I guess this might be still substantially cheaper than the opportunity cost of lost returns of your down payment.

tl;dr: Why limit your options already now: Buy a house (or rent) when you actually need it and know what you need and want in terms of location and size - in the meantime, invest in other, more liquid assets.

[TakeStock]

Thanks PB, you summarise far more succinctly than my original post.

To address some of your observations;

Why buy now (in next 6 months) - the location we have chosen covers both work and family nicely
We would rent the house out until we return (nice to have someone else help pay the mortgage)

The reason I'm not comfortable to put the cash in my index funds is that I may need it in less than 2 years, so the risk that we enter a recession and my deposit capital has reduced is there, or, markets rise and it increases.  Either way with my timeframes potentially being 2 years or less it's too high a risk.

The type of house and location etc that we want we are clear on. 
The other factor to consider is that a lot of the properties we've been tracking are being reduced, the very best stuff is still selling quickly however there does appear to be a general trend downwards, so perhaps it makes sense to wait longer (Brexit, UK inflation, interest rate increases)..

Having saved hard, it feels wasteful to have so much cash on hand not working in the market or at least generating rent in our future family home.

[Rimu05]

I don't understand the buying a house now. If you rent it out while you are abroad, you will definitely need someone to manage that. I say this with no experience in real estate but having read and rented enough to know, I will NEVER get into real estate. I envy those who have the patience for it. I've lived with terrible roommates in college, had our bathroom start leaking and that took like a week for the landlord to fix. Can you do that abroad or will you hire someone to manage it in your place? do you plan to fly back to look at housing?

On that note, if you are planning to buy a house, I wouldn't put that money in index funds. Yes different opinion here, but I see some people here put their emergency funds, etc in index funds, but for me the point of this type of money is to not be prone to stock market changes and to sustain you during the down turns.

[TakeStock]

Thanks Rimu05, we already have a house in the UK which we have rented out whilst working overseas for the past 5 years.  The process of managing it is not too difficult, we have a good handyman who can help tenants with any issues etc.

I'd love to put the deposit cash to work in the market (index funds) as it feels wasteful to let inflation nibble away at it.  If the SG dollar keeps appreciating and UK house prices continue to reduce then technically cash is not a bad position to be in.

[PapaBear]

I would like to circle back to one of your questions of your first post:

Our conundrum is whether to spend £800-£900k+ on a house whilst debt is cheap or buy something much cheaper say £500k and invest aggressively? 

In the UK any gains on your primary residence are not subject to tax, so the old adage has been buy the most expensive (best value) house you can afford and let inflation work its magic over time on the debt and capital appreciation on the house over the long term 15-20yrs+. 

I'm not sure for what kind of answer you are looking for. The answer to this question depends on the goals you have.
If you want a big and comfortable home now (or in 2 years) - go for it, you can most likely afford it.
But if your goal is to maximize your net worth to be able to retire early, then you need to invest heavily in income-producing assets or at least appreciating assets that you can liquidate regularly. Remember, the 4% rule or any similar approximation only works on invested assets and therefore exclude your private home.

In FIRE, you can't feed your family on appreciation of your house, you would first need to move and sell to realize the appreciation.
Thus, it might be in your favor to buy a cheaper house that fits your criteria and needs and invest the difference.

Additionally, in the long-term view, total returns in the stock market will most likely exceed the appreciation of your house, even with the tax-free capital gains of your primary residence. Especially if you fully utilize the various forms of tax-sheltered accounts (ISA, SIPP, etc.) as soon as you are back in the UK.

---

Having said all that, I guess the most important part right now is to relax and realize in what kind of fortunate position you are in right now.
All needs are covered for, you don't need to buy a house since you have a place to live, but you have the funds available if a good opportunity arises.
This is the best bargaining position you can wish for.

Thus, If you want to buy a house, I would just not worry about a specific deadline or general price trends - just observe the market in the area you are interested in and act when an interesting opportunity comes up. If that is tomorrow, in 6 months or in a year - that does not really matter. Your money is fine in a current deposit account in the mean time and inflation will most likely not kill you in a year. Loosing money with short-term bets on the volatile stock market is more expensive.

[TakeStock]

I would like to circle back to one of your questions of your first post:

Our conundrum is whether to spend £800-£900k+ on a house whilst debt is cheap or buy something much cheaper say £500k and invest aggressively? 

In the UK any gains on your primary residence are not subject to tax, so the old adage has been buy the most expensive (best value) house you can afford and let inflation work its magic over time on the debt and capital appreciation on the house over the long term 15-20yrs+. 

I'm not sure for what kind of answer you are looking for. The answer to this question depends on the goals you have.
If you want a big and comfortable home now (or in 2 years) - go for it, you can most likely afford it.
But if your goal is to maximize your net worth to be able to retire early, then you need to invest heavily in income-producing assets or at least appreciating assets that you can liquidate regularly. Remember, the 4% rule or any similar approximation only works on invested assets and therefore exclude your private home.

In FIRE, you can't feed your family on appreciation of your house, you would first need to move and sell to realize the appreciation.
Thus, it might be in your favor to buy a cheaper house that fits your criteria and needs and invest the difference.

Additionally, in the long-term view, total returns in the stock market will most likely exceed the appreciation of your house, even with the tax-free capital gains of your primary residence. Especially if you fully utilize the various forms of tax-sheltered accounts (ISA, SIPP, etc.) as soon as you are back in the UK.

---

Having said all that, I guess the most important part right now is to relax and realize in what kind of fortunate position you are in right now.
All needs are covered for, you don't need to buy a house since you have a place to live, but you have the funds available if a good opportunity arises.
This is the best bargaining position you can wish for.

Thus, If you want to buy a house, I would just not worry about a specific deadline or general price trends - just observe the market in the area you are interested in and act when an interesting opportunity comes up. If that is tomorrow, in 6 months or in a year - that does not really matter. Your money is fine in a current deposit account in the mean time and inflation will most likely not kill you in a year. Loosing money with short-term bets on the volatile stock market is more expensive.

You've hit the nail on the head exactly, we are very fortunate and grateful.  At the same time, I'm impatient to get to a position where we are at least FI.

Our original plan was to get to around £2.35m with a fully paid off house at £850k and £1.5m in Index funds and a 4% withdrawal rate. 

I really don't desire a huge house (will come with its own running/upgrade costs) just something large enough to host family get togethers on the weekend (wife is one of 5 siblings).  In the area we are looking at, this can be achieved from £600k+. 

We will most likely go for something in the middle ground 650 to 700k if we can negotiate a discount.  Then we can divert the rest of the funds to our index strategy.

I think you're right, once you factor in running/improvement costs on a house vs ISA + SIPP strategy, the returns in the market over a 30 year term should be larger.  It would be an interesting calculation to look at some scenario's. 

Thanks for your comments and input, it was exactly the kind of clarity I was looking for.  The answer is that we need to re-evaluate our goals and build our plan accordingly. 

[PapaBear]

I think you're right, once you factor in running/improvement costs on a house vs ISA + SIPP strategy, the returns in the market over a 30 year term should be larger.  It would be an interesting calculation to look at some scenario's. 

I don't have a full scenario, but a rough estimate with public data already puts this in perspective:
I compared average house prices from two UK regions (London and South East, the ones with the highest avg. prices) with an accumulating ETF on the MSCI World (dbx tracker MSCI World ETF 1C, one of the few accumulating ETFs with more than 10 years of data available online).

CAGR for the 10 year period from April 1st, 2007 - April 1st 2017
- House prices in London: 5.6%
- House prices in South East: 3.4%
- ETF on MSCI World: 8.8% (when converted to GBP)

Even if I factor in 20% Capital gains tax of a taxable account, I would reach a CAGR of 7.5% with the ETF.

The interesting part is that quite a lot of the growth is coming from currency fluctuations, as the ETF CAGR in USD is only 4.0%
However, this calculation is not factoring in any cost for maintenance or repair, as well as no cost of sale for either ETF or house.

Caveat: As for any asset class, this is only a snapshot of an arbitrarily selected time frame and past performance is no indicator for future performance.
Additionally, a 100% stocks asset allocation is quite risky, so a more conservative 70% stocks/30% bonds asset allocation might show a slightly different picture.

Notes:
- I took the housing data from UK House Price Index, Table 4 (https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/apr2017#house-price-index-by-uk-country) - You might want to check the averages for your region
- ETF data is available at https://etf.deutscheam.com/GBR/ENG/ETF/LU0274208692/B1WG961/MSCI-World-Index-UCITS-ETF

[TakeStock]

Thanks PB, very interesting and insightful, with my stocks/bond allocation of 80:20 it still indicates that directionally the market over the long term offers greater appreciation potential. I really appreciate your inputs, thank you.