Homes are for living, not investing, in
Posted by Robin Powell on February 28, 2018
We Brits have a different kind of home bias to investors elsewhere. Of course, we favour our own country’s stocks, just like most people in other parts of the world. The UK accounts for about 4% of global GDP and yet it’s not uncommon for British investors to have 50% of their equity portfolio allocated to UK companies. But that’s what I’m referring to. No, I literally mean we’re very biased, financially speaking, towards our homes.
Every week the Sunday Times runs an interview with a well-known person about their finances, and every week the interviewee is asked, which is the better investment, property or pensions? Almost invariably the answer is property.
It’s certainly true that over the last 25 years house prices have risen sharply in the UK, and indeed in most developed countries (Canada and Australia are particularly glaring examples). Most of us are familiar with those tiresome dinner party conversations, often dominated by early adopters of buy-to-let property investing, about how large a paper profit everybody’s made. That sort of talk plays on our emotions. It can be very unsettling to hear about someone we know who seems to have made a killing, apparently by spotting an opportunity that we somehow missed.
The important thing to remember, as with all types of investing, is that the past tells us very little about future prices, at least in the short- to medium-term. Often they put it down to their superior intelligence or entrepreneurial skill, but the truth is that those who invested heavily in property in the early 90s have simply benefited from a gigantic bull market.
Of course, it’s perfectly possible that residential property will continue to rise for a long time yet. It’s also possible — in fact far more possible now that prices have rushed so far ahead of average earnings — that we’ll see a sharp correction, or perhaps a full-blown crash, at some stage in the future.
The question is, then, is residential property a sensible investment in 2018? I have no idea whether prices will rise, fall, or stay the same over the next few years. All the time we’re bombarded with “research”, often produced or commissioned by mortgage lenders or chains of estate agents, telling us what the future holds. A report was published yesterday, for example, predicting that prices in UK urban areas will rise 30% by 2022, and giving astonishingly precise forecasts for specific cities. The truth is, however, as with the stock market, that no one knows where prices are heading.
Ultimately, for anyone facing a decision about investing in property, it all boils down to risk. If you can afford to take that risk, and you’re the sort of person who won’t punish yourself if prices plummet by 20, 30 or 40% in the next two, three or five years, go ahead and get on the property ladder, upgrade to that bigger house you’ve always dreamed of, or buy yourself a holiday home.
If you’re not in that position, or perhaps you have a different personality, you need to be brutally honest with yourself. Do you really need to buy your own place? Can you make better use of the space you already have? And wouldn’t a mortgage on a flat with a sea view be better spent on holidays wherever in the world takes your fancy?
I recently interviewed Lars Kroijer about investing in residential property, among other subjects. Lars is an investment author and former hedge fund manager. For him, the most important thing for investors to do, along with keeping their costs down, is to stay diversified. Most people understand the logic of not having too many eggs in one basket. Yet it’s surprising how many people, when thinking about diversification, disregard what’s usually their biggest financial asset of all, namely their home.
If you already own a home, or have a mortgage on one, you are already very heavily exposed to the residential property market. Buying another property will make you even less diversified. Yes, looking back 20 years from now, it might look like a shrewd investment; but it could just as easily go the other way. Many first-time buyers today can’t remember the last crash. Take it from those of us who can that house prices, like stock prices, can fall very quickly; selling your home for less than you bought it for you, or spending several years in negative equity, isn’t much fun.
You can read the interview with Lars on InvestWithETFs.com. It is full of useful insights — and not just on residential property but also on cryptocurrencies, the financial media and the benefits of using a financial adviser.
ROBIN POWELL is the founder and editor of The Evidence-Based Investor. A freelance journalist, he runs Regis Media, a specialist content marketing consultancy for financial advice firms around the world. You can follow him on Twitter and on LinkedIn.
The Evidence-Based Investor is produced by Regis Media, a boutique provider of content and social media management to financial advice firms around the world. For more information, visit our website and YouTube channel, or email Sam Willet or Christina Waider.
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