Citywire: I want to give my children their house deposits - here's my plan

Really2

http://www.citywire.co.uk/money/i-want-to-give-my-children-their-house-deposits-heres-my-plan/a433726?ref=citywire-money-latest-news-list

Oddly topical after some recent threads,

fair bit to digest

I suppose the first rule to managing anything, from an investment portfolio to a vast company, is to know what you want.

When it comes to my money, I often don’t. But there is one thing I know I do want my money to do for me. I want to have enough money to give my young children the deposits for houses when they are eighteen.

My Mum did that for me when I was in my early twenties – and luckily for me it coincided with the start of the London housing boom. (well mine did not but shows the concept is not a new idea)

In that respect, and in another, I am incredibly lucky. Namely, I have decided this is something I want while I still have time to achieve it. I am 28 and my children are two years old and six months old. So I have time, at least sixteen years for my oldest.

I know not everyone is in the same position but here I present my strategy to solve this problem. In future I plan to set out how I would solve this problem if I were older and had a shorter period of time.

Solving the problem for me

The first question I must ask myself is how much money my children will need in sixteen years time in order to put down the deposit for a house.

Clearly my starting point is how big a deposit I want them to put down – 10% at least. Next I have to ask how much houses will cost in sixteen years. That’s tricky. We can bang on endlessly about what house prices are going to do in the years to come but ultimately what impact will our economic predictions have over such a long time period? Probably not much.

I have little choice but to assume the average long-term growth in house prices seen over the past forty years will continue over the next sixteen years. The reassuring thing about investment is that over the very long-term things do tend to behave predictably - it’s just that in the short-term the news confuses us so much that it is hard to see this.

The housing economist at Capital Economics, Paul Diggle, argues this is the best approach: ‘The next ten years for the housing market will probably not be very different to the last fourty years. It is the past ten years that have been the anomaly. We are forecasting that for a few years from now house prices will actually fall but over the long-term the average will reassert itself.’

That average growth in house prices over 40 years is – in real terms – 2.4% a year. In other words if you add together the rate at which prices in general rise (inflation) and the rate at which house prices rise above that you end up with a number that tells you how much £1 invested today would have to grow by in order for it to still have the same buying power for my children in sixteen years time. At the moment pension funds – which watch inflation closely – are estimating long-term inflation of 3.6% in the UK. Right, so I need to make my money grow at...add it together...6% a year in order to make the money I save now do its job.

But I also need to know the actual amount of money I need to have sitting in an ISA or bank account in sixteen yearss. I know that the average price of a two-bedroom London flat today is £199,699. If this price grows at a rate of 6% over the next sixteen years then adding together the impact of compound returns (which I will come to) my lovely children - who now want for nothing except an Upsey Daisy doll - are then going to need to shell out a whopping £507,306 for their flats. I need to find 10% of that so that's £50,700 for each of them if they are going to have the deposit I want them to have....gulp.

That’s a lot of cash.

I agree with the guys idea, but I am thinking more fund further education by prepairing now, and downsizing when my son wants to buy somewhere and paying his deposit with that.

Generali

Really2 wrote: »

http://www.citywire.co.uk/money/i-want-to-give-my-children-their-house-deposits-heres-my-plan/a433726?ref=citywire-money-latest-news-list

Oddly topical after some recent threads,

fair bit to digest


I agree with the guys idea, but I am thinking more fund further education by prepairing now, and downsizing when my son wants to buy somewhere and paying his deposit with that.

For the bloke you quote, BTL would be the obvious investment vehicle as returns from it should perfectly correlate with what he wants to do with the money.

Really2

Generali wrote: »

For the bloke you quote, BTL would be the obvious investment vehicle as returns from it should perfectly correlate with what he wants to do with the money.

Good point, nothing will keep up with house prices more accurately than a house.

dopester

Really2 wrote: »

Good point, nothing will keep up with house prices more accurately than a house.

Or fall with it.

I have little choice but to assume the average long-term growth in house prices seen over the past forty years will continue over the next sixteen years. The reassuring thing about investment is that over the very long-term things do tend to behave predictably - it’s just that in the short-term the news confuses us so much that it is hard to see this.

Rofl. Next 16 years just like the last 40 eh? Hurts his head to look past a few years. Rush to BTL! Over the long term... 60 years of rising values, with a final big push of credit expansion - is no basis for assuming that it always the way it will be for property values. Welcome to the UK in which people have a lot less money in their pocket and is overwhelmed with debt in the system.

Ashcourt Rowan head of research Tim Cockerill says: “It is a complicated picture. Looking at the broad spectrum of investors, many are simply are not focused on inflation. Nobody in the UK can have escaped Government negativity with cuts imminent and this has meant people are happier to hold cash and gilts.”

With the Government set on a programme of sharp public spending cuts there is the risk of a permanent destruction of capacity. Not only would this imply lower living standards than in the recent past but it would also put a cap on long-term growth prospects if the public become convinced that consumption is inherently the wrong course.

For the moment at least, bond markets appear to be siding with King in predicting strong downward pressure on inflation. If they are wrong and inflation spikes upward, buying into low-yielding government paper could prove a hugely costly decision. However, if they are right in thinking the UK could suffer a bout of deflation and be pushed into another recession, the outlook for most asset classes is pretty dire.

Today: moneymarketing.co.uk news

Really2

dopester wrote: »

Or fall with it.

Rise or fall it still tracks the price perfectly.

AD9898_2

I said I wouldn't post but I have say that seriously, anyone believing for a second that the next decades will be like the last 4 are completely and utterly deluded.

What we have seen in the last 2-3 years is merely the beginning of a complete breakdown of most things we have come to know.

People need to get used to the idea that rising expectations that follow the arrow of time are misplaced. If they don't get used to the idea, the idea will be forced on them in the fullness of time.

dopester

Really2 wrote: »

Rise or fall it still tracks the price perfectly.

The person in your article would be better off saving towards their projected £50K for 10% deposit, in my opinion, rather than opting for getting into BTL now, and renting it out until the children become adults. Especially if to do it now required a MEW on their main home.

Really2 wrote: »

I agree with the guys idea, but I am thinking more fund further education by prepairing now, and downsizing when my son wants to buy somewhere and paying his deposit with that.

That seems a fairly reasonable plan. My plan was to buy a house which can practically allow for children/adults to have their own independent space within it, so to live with us when adults. However that would narrow down whatever choices they might have in what they want to do with their lives. Where they want to live. They might want to live in London or USA or something. Could take lodgers in though, and give children option of returning home.

Same issues with location, not just with values, arise if buying a BTL property for a child long in advance, in this market now, - although they could sell it I suppose (assuming it's not deep in negative equity).

Graham_Devon

Really2 wrote: »

Rise or fall it still tracks the price perfectly.

And if it did fall, it would continue to cost you maintanance & legal fee's. Plus void periods don't half play havoc with the percentage yield.

Savings would be my option. At least that way you don't have the maintanance fee's (unless you opt for such products), no legal costs to stump up, and it's not likely that the nominal value could fall.

Really2

AD9898 wrote: »

I said I wouldn't post but I have say that seriously, anyone believing for a second that the next decades will be like the last 4 are completely and utterly deluded.

What we have seen in the last 2-3 years is merely the beginning of a complete breakdown of most things we have come to know.

People need to get used to the idea that rising expectations that follow the arrow of time are misplaced. If they don't get used to the idea, the idea will be forced on them in the fullness of time.

I think his point is that accounts for the worse case if you are saving the money.

If you account for the worst (they acknowledge the last 10 was way over the top.) you would guarantee to be ok.
The point is what do you base it on. Go back 60 years and the HPI is even higher.:eek:

So if HPI is going to be less over the 16 years, for the reason he is doing it overstating it is not a bad thing. He will have saved a bigger deposit for them.

Really2

Graham_Devon wrote: »

And if it did fall, it would continue to cost you maintanance & legal fee's. Plus void periods don't half play havoc with the percentage yield.

Savings would be my option. At least that way you don't have the maintanance fee's (unless you opt for such products), no legal costs to stump up, and it's not likely that the nominal value could fall.

I read it,

It was Generali's point not mine (so perhaps you got the wrong person?), I simply agreed nothing tracks property prices better than property.

My comments on what I will do are under the article.

Chris2685

I would say the best option is to save in different areas, as you might do for a pension pot. At the moment for my daughter I am paying money into a shares scheme which was really brought about due to child savings voucher we got when she was born.
We also pay some money in each month to a regular savings account for her too.

The only problem with both these options is that they are in her name, so if she decided to when she was 18 she could go and blow the lot on coke and sweeties. Hopefully, upbringing will play a part into her not doing that!

I suppose the good thing about investing in a house is that it is yours, but then I would get taxed on it if I were to give her a large lump sum when she got older.

It's a bit of a minefield, I don't think there are any right or wrong ways. If I was rich enough to invest in a second home I don't think I would need to worry too much about their future finances anyway!