Cliff D'Arcy foresaw the coming housing crash and sold his family home five years ago to wait out the falls as a tenant. How did this decision turn out?
During the property crash of the early Nineties, my girlfriend (later my wife) and I decided to buy our first home. After many months of looking around, we found an ideal two-bedroom home. This end-of-terrace house was advertised at £90,000, but, after serious haggling, we bought it for £72,500 (almost 20% off) in December 1992.
Twelve happy years as homeowners
We enjoyed many happy years in our home, which we made into our neat little nest. After having two children, my wife and I agreed in 2004 that we needed a bigger home. So, we put our house on the market and started looking for a bigger place. We quickly found a buyer for our property, but took the decision to rent, rather than buy, given the growing house-price bubble.
We moved into a rented house in October 2004 and then sold our cottage almost five years ago, in April 2005. It sold for more than 3½ times the purchase price. In total, we made a tax-free profit of 253% over 12½ years, which comes to a tidy 10.6% a year.
Four years of renting
Our decision to sell without buying was not made lightly, but based on my interpretation of the trends and likely outcomes for the housing market.
With prices rising from 1995 to 2005, I felt that a correction was long overdue. Of course, we bailed out too early, as prices continued to rise until 2007. Indeed, three years after I sold, my neighbour sold his house for £110,000 more than I had, though he had bought at a much higher price.
Thus, in our early days as STRs ('Sell to Renters'), property prices moved strongly against us. I was teased a lot by my wife, family, friends, readers and anyone who didn't share my view that an economy built on selling houses to each other was sure to fail. Nevertheless, my belief was unshakeable, so we sat on the sidelines.
While awaiting the inevitable crash, I refused to leave our cash pile earning a measly 3% a year after tax.
Although our housing cash was initially held in Northern Rock, I slowly invested it in 'value shares' offering attractive dividend yields, as well as the opportunity of capital gains. For the first two years, our housing cash was largely invested in banks and insurers. I had the good fortune to exit this market at a tidy profit when I saw the early signs of the credit crunch in 2007. Later investments also proved profitable, helping to increase our housing war-chest.
By the way, selling your home and investing the proceeds in shares is not a strategy that I would recommend to anyone. We did it in order to exit an over-valued property market in favour of buying under-valued shares. For now, our strategy has worked, as our personal wealth continues to rise.
Then again, this may be more down to luck than judgment!
Life as tenants
Thanks to our national obsession with property ownership, life as a tenant has been somewhat interesting.
Homeowners are amazed that a well-off, educated couple would voluntarily leap off the housing ladder. Indeed, most people thought us insane, even though we've enjoyed a high standard of living while renting. Nevertheless, there are pitfalls to renting, even for professional people renting an upmarket home.
Our first tenancy lasted for two years. It would have lasted three, had our New Zealand-based landlord not decided to sell his London home. Happily, our forced move was relatively painless, as it took us to an even nicer house diagonally opposite in the same street. The good news (for us, at least) was that falling rents slashed thousands of pounds a year from our household expenses.
To buy or not to buy?
As things stand, I see few 'green shoots' for the housing market, despite the brave claims of various vested interests, such as mortgage lenders, estate agents, property firms and politicians. If unemployment continues to soar, then this spells disaster for house prices.
Finally, I will give a strong warning to anyone thinking about selling to rent. Your partner's 'nesting instinct' may be very strong, especially if you have young children. Hence, no matter how successful your STR timing is, don't expect much praise for your decision to become a tenant, no matter how successful the outcome!
This article is a lovemoney.com classic, originally published on 30th April 2009, and has been updated