Over the last few weeks, we’ve taken the decision to make some improvements to our home. We’ve incurred significant costs in doing so and it make me wonder if being House Proud is financially sensible thing to do.
For those of you who’ve not being keeping up with the Gentleman’s Family Finances home story I’ll give a brief description of our family life so far:
In 2016 the Lady and I bought a house in a nice part of a not so nice town in Scotland. It’s a great big house with huge rooms, tall ceilings and “original features” that would have Kirsty turned on. Thinking that this might be our “forever home” or at least somewhere we live for a few years and since the house was not entirely to our taste, we set about planning and making changes to it. First we had new radiators (and NEST thermostat – great purchase, bathroom (with shower pumps for higher water pressure – essential), kitchen and floors in the dining room and kitchen installed as well as two wood burning stoves. Then along came the Master and later the Little Lady and we stopped for a bit – the first bit of “work” cost about £10k or so.
(For what it’s worth, radiators are cheap, kitchens are not and finding a good tradesman is difficult – if you find one, never lose his (or her) number!)
Last year (2019), feeling like we had too much money, we had the sash and case, single pane windows refurbished (the joys of living in a Listed Building.
All that really remained to do was to replace the cheap (but functioning) carpet downstairs and the floors in the kitchen and dining room (cheap and poor quality and very badly fitted), and two new radiators in each of the living rooms (which are big, cold rooms). There’s an advantage of keeping what you have already – it’s free! Carpet is warmer and softer (for when your kids fall, and they do fall!) and the money not spent today can grow (if well invested) to make your richer. I’ve calculated by keeping the carpet downstairs and only replacing the 40m2 in the kitchen/dining room cost us about £900 extra but the new floors that we have or so floors that were laid in 2016. Doing a few sums and we’ve saved money.
Spend £6000 in 2016 = £10,000 in 2020 GFF money
Spend £900 in 2016 and £7000 in 2020 = total cost of £8,500 in 2020 GFF money = £1,500 saving
We also have new floors now when the kids are a bit older and less likely to either damage the floors or damage themselves. We made the same hypothetical saving with the radiators.
Property as an Asset or Liability?
Have you ever read Rich Dad, Poor Dad? It’s an engaging read (if slightly fabricated/exaggerated/simplistic/gateway drug to BTL) about how some people view property as an asset (property is m’pension brigade) and those that view it as a liability (it costs you money!) For more information, 7 Circles has a great review of his book(s – since they are all the same really).
But if you think about it, our attitude to whether sitting in a million pound house which you can’t afford to repair (or even buy now) makes you rich is a funny one. Whilst in capitalist nirvana America there is in effect Land Value Tax on property values meaning a million dollar house in New York costs the owners about $16,000 a year in property taxes or 1.61%. In the UK, council tax is a fraction of that and in somewhere like Westminster, the average million pound property pays around than 0.1% in council tax. The UK system makes property hoarding a profitable way to spend your life. Easily accessed leverage (if you can get a mortgage), capital gains tax exemption on (the good type of) inflation, inheritance tax exemption when you die.
Property is maybe an asset and maybe a liability but it doesn’t produce any prosperity itself directly. It can also tie you down to one place, meaning you are less mobile when looking for new jobs, career or opportunities. High house prices also scare me away from living/working in London – I thought about it before but the huge cost to do so and the drop in my quality of life put me off. So where does that leave me with our home improvement?
Property investment or money down the drain?
I value my house based on when I bought it and what the house price index says houses are worth in my area now. [www.ros.gov.uk] I update the value every month and put it into my spreadsheet. Recently I was very concerned property prices would collapse, but then again the market is crazy here so any talk of a House Price Crash [www.housepricecrash.co.uk] is a post-Covid threat.
But should I start saying that since we spent £10-20,000 on our house, like a new kitchen, windows, floors etc… that our house is worth more? Could I call the £7,000 new floors an investment instead of an expense? Hell, the new floors actually cost £7k but added £10k to the house value – I can say I’m making money? You’ve got to accumulate to speculate!
I say no to this. It’s money down the drain. It doesn’t boost the property value and it’s just an expense, nothing more. It might well increase the value of the house but since we’re not moving anywhere anytime soon, altering a cell value on a spreadsheet just to feel better about your buyer’s remorse (did we ever choose the right floorboards? is just foolish and disingenuous.
Years ago I had a colleague who lived in a new build estate and he put a £30,000 extension on the side of his house. He proudly told me that “it’s added £70,000 on to the value of our house”. When I pointed out to him that there were a few identical houses to his for sale right now and anyone with half a brain could spend £30,000 themselves and didn’t need to pay him an extra £40,000 he just didn’t understand it. Maybe I was wrong since he had actually had the work completed (getting tradesmen to finish work is a headache and anyone who’s seen Grand Designs knows that it’s not easy). My point is that if home improvements add value – adding value from spending money, then home potential is even more lucrative – latent value baked in without spending a penny. It’s the same way that home builders can make more money from just land banking instead of building new houses.
This is a concept that I have been thinking about recently and from what I can tell, nobody else does this. Our mortgage interest is about £200 a month and I calculate that we “save” about £100 based on our equity. I factor in about £500 a month for housing repairs and costs (to soften the blow of spending so much on large expenses. Making total housing costs about £800 per month. If we were to rent, then the cost would be about £1,200 a month meaning that we save £400 a month. But I don’t know of any personal finance blogger who counts this inputted rent saving as a fictional income against fictional inputted rent.
I could even say that the new floors increase our notional rent to £1,300 a month meaning that we save an extra £100 in inputted rent and we’ll break even on the cost in 6 years’ time. How about that for wizardry? I’ve managed to turn massive spending into a money making machine that shows that we should ramp up our spending to make ourselves richer – on paper anyway.
Sam Vimes’ Theory of Economic Injustice and GFF’s Main Reason In Favour of property Ownership
We opted for expensive floors in our house because we wanted something that would last a lifetime (or at least a youth time of our kids) and buying cheap means that they don’t last as long, they break and in general you have a poorer quality product. This is the same for floorboards, walking boots, furniture and a whole load of other things in life. Those of a poverty mindset (like myself) are beset with the belief that they don’t like the rich people who have expensive things. Equating expensive with not good, they turn being cheap and frugal into a virtue. Oakley sunglasses for £100 or cheapo ones for a fiver? Thinking like that can lead you to keep buying rubbish when a good quality product would have lasted longer and saved you money. I think that Simple Living in Somerset said it better than I ever could.
So, I’m learning to let go of the purse strings when it comes to spending more on quality (which you can appreciate) that will save you money (which makes you richer and happier over time).
The Balance Between Home Improvement Spending
I believe that there are substantial costs to owning a home and notwithstanding inputted rent, it’s always going to cost you money to live somewhere. Sometimes you’ll need to spend a lot of money to get what you want but if you need to spend the money, you might as well do so with a long time frame in mind. Buying quality products that last is a sensible thing to do and if it brings your enjoyment from living somewhere nice, then that’s fine. Just don’t expect a monetary payback from your spend because when you come to sell your house, your choice of flooring, colour of kitchen or love of leopard print wall paper may not be to anyone else’s taste.