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Geographic Arbitrage

Geographic arbitrage

This week a generation of year 6 students will find out which high school they were admitted to.

In the United Kingdom local authorities have a legal obligation to offer every year 6 student a place at a secondary school.

That place does not have to be at an educational institution of the student’s choosing.

It is not necessarily at a school within a viable commuting distance.

Nor does it have to be a good school.

In fact all that is guaranteed is a place. At a school. Somewhere.

Winning the ovarian lottery

Of course life could be worse. According to Unesco there are around 60 million similarly aged children around the world who do not attend secondary school at all. It sucks to be them, it really does. I am grateful to have both the means and the opportunity to bring up my children in a location where secondary schooling is an option.

UNESCO eAtlas of Out-of-School Children

Percentage of out-of-school adolescents of lower secondary school age. Image credit: Unesco.

That said I have a confession to make. Much as it pains me to admit this, I live in one of the most expensive parts of one of the most expensive cities in the world.

England and Wales property prices per square metre

England and Wales property prices per square metre. Source: Office of National Statistics

Institutional silliness

This creates a fascinating, yet unfortunate, dichotomy.

Those parents who can afford to, pay for their children to attend private schools, some of which rank amongst the best in the world. Annual tuition costs are in the region of £25,000… roughly the same amount as the average annual gross UK wage! Those fees do not include uniforms, textbooks, extracurricular sports, school camp, nor music lessons.

Parents who are unable or unwilling to afford those fees are left to navigate the state school system.

There are some state schools in my local area where the students have almost the same chances of receiving an Oxbridge or Russell Group university place offer as private schools.

There are also state schools where it has been more than 5 years since any student was offered a place at any university.

Unsurprisingly the catchment areas for the good schools are vanishingly small.

The best state school in my area has a catchment area less than a mile wide, within which the average price per square foot of residential real estate exceeds £2,000!

Within that catchment area there are (somewhat suspiciously) more applicants than there are places. In fact the school is oversubscribed to the tune of 12 applicants for every place. As a personal finance side note, these catchment areas are great locations to own residential investment property!

In-demand state schools conduct aptitude tests for aspirational applicants.

Results are then ranked top to bottom, then divided into quartiles.

The top [n] students in each quartile are then offered places at the school. The idea is to appear non-selective, with the school admitting as many (rich) smart kids as (rich) dumb kids.

Not quite dumb enough

This diabolical admissions process is virtually impossible to game. Unless you can guarantee that an applicant will be the top of the top quartile, there is no way of ensuring a place as they are entirely dependent upon the performance of the other applicants within their year group.

In fact it is entirely possible (likely even) that a student who does their best in the aptitude test will end up being “not quite dumb enough” to be offered a place a lower quartile.

Geographic arbitrage

Yet here is the thing. Many parents pursue geographic arbitrage by betting 1 year’s rent against 7 years worth of private school fees, that their child may be offered a place at a great state school. If the bet pays off the parent has saved themselves in the region of £150,000 in school fees.

By way of comparison, £150,000 is roughly three-quarters of the average” UK property purchase price.

University education for fun and profit

The income earning advantages of a tertiary education are well documented. Regardless of how well-heeled the neighbourhood, parents shouldn’t have to pay private school fees to keep that door open for their children.

Those parents who can’t afford private school fees shouldn’t feel compelled to bet a year’s wages on maintaining an address within a catchment area just so their child stands a long shot chance of gaining admission to a good school.    

The importance of a Plan “B”

There are alternative options, such as a nearby state school that offers the International Baccalaureate program, for free.

Or they could further embrace geographic arbitrage and move to a lower cost, less competitive, school district.

Or they could admit defeat and continue residing in the vanity locale while sending their child to one of the failing schools where they do not stand a realistic chance of attaining university admission.

Whatever the choice, the winners are the investment property landlords within the good school catchment areas, who receive full rental payments without incurring much (if any) wear and tear while the anxious parents await the outcome of the admissions process.

It is a crazy system.

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