Hacker News Reader

Comment by MarkMc | Hacker News Reader

In 1720 an ounce of gold in London cost about £4.31 [1] and today it costs £768. So the effective interest rate for gold over that period has been about 1.8% per year, while the gilts paid 2.5 - 4% according to the NY times article.

So despite the huge depreciation of the UK pound over almost 300 years, buying UK bonds in 1720 was a much better investment than gold.

And yet buying a property in London probably would have been an even better investment - a 'barrel store' in Picadilly cost about £2,500 [2]. Today it might be worth 10,000 times as much, giving a compound return of 3.2% per year plus a significant rental income.

[1] http://www.measuringworth.com/

[2] http://www.independent.co.uk/arts-entertainment/books/review...

View on HN

I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed give a rate of roughly 1.78% per annum, compounded annually. (Also known as CAGR)

However, this rate cannot be directly compared with a bond coupon rate. Bond coupons are cash flows that are not automatically reinvested/compounded.

Even if one were to reinvest them, one would have to reinvest at the prevailing yields at the time the cash flows were received, a somewhat more involved calculation. So that 2.5%-4.0% coupon rate does not represent an annually-compounded rate and thus is not directly comparable to a CAGR.

Apples and oranges, so to speak.

To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return.

Simple interest, not reinvested: £42.32 Compount interest: £25,622.49

As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns.

Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today.

I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.

> Of course, such a return is actually very hard to maintain over a 300 century timespan.

You mean 3 century timespan, or 300 years. (Although it would be spectacularly difficult over a 300 century timespan.)

Sure, but in this case wouldn't the 'prevailing rate at the time the cash flows were received' generally have been higher than the original coupon? Presumably the reason UK government waited 294 years is because the interest rate on UK gilts has never dipped significantly below the original coupon rate until now.

Yes, I believe your original point that bonds would have been a better investment than gold still holds.

But the way to compare that would have been to look at the "total return", i.e. assuming coupons had been reinvested, etc. (For example, there is an S&P 500 total return index whose growth reflects the theoretical reinvestment of all received dividends) I don't know if there is such a metric for these gilts, but if there is, then that total return rate would be more or less directly comparable to the CAGR for gold.

(Side note: Total return may not always apply in the real world, as the cash flows received may not be sufficient for reinvestment. Simple example: A bond with a face value of $1,000, coupon of 5%, payable each year. Assume that new bonds are issued each year with the same face value and that the face value is also the minimum purchase amount. Your yearly coupon of $50 from the original bond is not enough to buy new bonds and so it remains uninvested. Things like mutual funds/bond funds/bond ETFs attempt to solve this problem by allowing you to reinvest small amounts, albeit at the expense of charging you a management fee.)

Except the UK Treasury fixed the price of gold at £3.17s10.5d in 1717 and the price didn't change for ~200 years until the UK left the gold standard in 1931. So, zero compounding for 211 years.

The fixed price was set by Newton, btw.

Besides what stygiansonic said:

The article does not claim that UK bonds have been paying 2.5~4% since 1720. That range refers to the current nominal rate for those bonds. Those bonds have been restructured/refinanced several times along the years. That is, the UK "soft-defaulted" a few times.

Sovereign bonds aren't risk-free, especially not in the very long term.

The fascinating part for me has always been the power of compounding : 1.032 ^ 300 = 12703, while 1.030 ^ 300 = 7098 ! i.e., a difference of 0.2% per annum makes a 5600-times difference in final wealth.

Related : in the finance industry, there's a term called basis points (written bps, pronounced "bips"). 1 bps = 1/100th of a percentage. So that 0.20% is actually 20 bps, a royal magnitude in this new perspective of compounding :-)

12703 / 7098 = 1.78965x.

So a 6.7% increase in intrest rate (3.2 vs 3.0) makes a 79% difference in return after 300 years.

> And yet buying a property in London probably would have been an even better investment

I believe you never really own a property in GB. I think you own it for 99 years and then it goes back to the crown.

Not true, there are properties sold on a lease, but freeholds are very common. I own the land my house stands on in perpetuity.

It seems, to me, that freehold is not as common in London as in other parts of the country.

Is property tax waived for residents?

Residents pay council tax, it's a banded tax and doesn't get very high even for the most expensive properties.

UK has never quite had US-style property tax, as that would be incredibly unpopular with hereditary landowners. Instead we have "rates", based on imputed rental value and paid by the occupier of a property. There is also stamp duty at time of sale, and capital gains tax (which is waived for principle residence).

After a disastrous attempt at a poll tax, the system was renamed "council tax" for residential property. It's banded, so very high value property is under taxed. e.g. http://www.theguardian.com/money/2012/mar/09/council-tax-in-...

"Under" taxed in what sense? These taxes pay for things like street lighting and street sweeping, which is the same on every street. It should be the same fixed amount for everyone.

Actually most council tax revenues (usually 40 to 50%) go to the local police.

That's plainly not true. Even if we accept the notion that taxation occurs on a pay-for-direct-utility model (which isn't true in the general case for any western nation afaik), larger homes with more land will clearly require more lighting and sweeping per person than an apartment block.

Pretty sure that the local council doesn't sweep or light peoples private property, dude.

You do realise that the street outside a large property is typically substantially longer per person than that of an apartment block, right?

>It should be the same fixed amount for everyone.

We tried that. It didn't work.

Yeah... That's the dirty little secret of poll tax. It was fair and the people who protested were the ones who don't pay their fair share for local services.

Define "fair". You can't just s/equal/fair/. If you meant "equal", say it. Don't argue morals by wordplay.

I do, above.

It is patently absurd that, for example, the maximum council tax levied by The Royal Borough of Kensington and Chelsea is currently £2133.58.

You can own a £10m property in the borough, earning upwards of £1m per year in rental income and appreciation, and only have to pay £2k to the local council.

Meanwhile, those living in the absolute worst accommodation in the borough still have to pay £711.19.

That actually sounds about right. The logic of fleecing those who can more afford it may not have good moral foundation. Its tempting, but can you explain how the borough gives more benefits to the rich than the poor? Possibly just the opposite.

That is how the existing system is supposed to work, but the property valuations and bandings have become divorced from the current state of the property market.

Note that, in theory, a secondary function of the council tax should be to prevent habitable properties being left unoccupied for extended periods of time.

Unfortunately when the tax amounts to a rounding error on the ROI for a property, it is completely ineffectual. Hence the large number of empty 'investment' properties in London, further inflating an already overheated property market.

The rich have no moral right to real estate at all. Real estate was created by God or whatever you believe, not the sweat of ones brow. Property is a social construct; society sets the rules. Property tax is one way of smoothly implementing a lease concept (every century, the property must be repurchased from the government. This works out in both 99 year lease societies and in the common 1% annual tax rate societies).

Furthermore, there is no moral right to ineritance.

I guess we grew up in different societies then. Mine has definitely a strong moral right to property. Maybe you need to find one that works in your imaginary way.

If you're renting the place out, it's the residents that pay to the local council - so you don't pay a penny. However, you are paying income or corporation tax on the rent, and capital gains on the appreciation once realised.

Why should someone who's lived in a property for decades be taxed out of their house just because the area they live in has become a desirable area?

I mentioned the rental income more as an indicator of the 'utility' one derives from having use of the property during ownership. Alas, given how negligible the sum is in the scheme of things, it scarcely matters who assumes the burden.

To your actual point, to tax someone out of a £10m home in London today the council tax rate would have to be increased many thousands of times over. That is not a realistic danger.

This policy is seeing a resurgence of popular support in the form of the 'Mansion tax', but really all we need is a more equitable council tax.

NB: however there's also Inheritance Tax, which does upset some hereditary landowners; that's completely different to property tax, but including for completeness.

https://www.gov.uk/inheritance-tax/overview

That's completely optional tho'; Milliband didn't pay a penny on the £1.5M house his "socialist" father left him.

Reply on news.ycombinator.com