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As colleagues over the decades will confirm, the investment subject I loathe more than any other is house prices. Even gold — occupying the vacuous outer space of finance — comes a distant second.
And I’ve never typed a word on the yellow metal. So imagine my dread when it became clear I couldn’t avoid house prices any longer. Too much relevant news this week. Emails galore requesting advice.
That readers care is understandable. Here in the UK the value of housing stock is four times that of companies in the FTSE 100. The average price of a flat in some of the poorest suburbs of London easily exceeds my portfolio below.
Clearly a worthy topic, then. So why am I repelled? For starters I don’t own a house, although jealousy isn’t an issue. Nor is being excluded from a global conversation that has dominated my adult years.
No, what grates is the same problem I have with our obsession with interest rates, or the performance of private equity funds. We are blind to the facts, but seemingly don’t care — a mass delusion on an epic scale.
Then those infuriating inconsistencies. Are higher house prices desirable or not? When values fall, we shriek, and governments are blamed for pushing us into negative equity. And yet a housing crisis is also declared when people cannot get a foot on the ladder.
This is why I’d win no friends arguing whether prices are heading down or up. Instead, here are the most popular misconceptions I hear about home ownership at dinner parties. You will see why the invites stopped.
1. “Rupert thinks spending money on rent is just a waste, don’t you darling?”
Fine if you can pay for a house in cash. For the rest of us, why is the interest paid to a bank not a waste? Even with a 3 per cent mortgage over 20 years, interest amounts to a third of the total payments. At 5 per cent over 25 years, it’s three-quarters.
In the UK, two-year mortgages have just risen over 6 per cent, for the first time since 2008. If that rate held for 25 years you’d be purchasing your house twice over. Now that’s what I call a waste, Rupe — that money could have funded a start-up.
2. “Daddy told me house prices always go up. He bought me a flat out of college.”
Well, most assets rise in price due to inflation. In the short, medium and long run, however, the statement is hogwash. Steep and sudden falls, or long periods of prices drifting — such as in continental Europe until recently — are common.
How about the 40 per cent plunge in Hong Kong property prices in 1997, or the one-fifth decline in the US and UK — the former during the financial crisis, the latter in the early 1990s? Daddy must remember those.
Likewise in the medium term, Japanese house prices declined year after year for decades after the bubble burst in 1989 and ended up two-thirds lower on average. Some condos fell 90 per cent in Tokyo.
And in the long run, housing is mostly an awful investment, barely keeping up with inflation in developed countries. FTSE 100 returns are double UK house price growth since 1990. In the US, equities have given you 15 times the return of housing over 100 years.
3. “It’s all about supply and demand . . . no land, building restrictions, blah blah.”
What is ironic about the Hong Kong and Japanese examples, is that locals never expected a crash for the same reasons given in the UK today — that supply is constrained.
Nonsense, look out an aeroplane window. Even in Japan, where just 14 per cent of land is suitable for construction, when the panic set in, suddenly there was plenty of supply. The first thing I noticed when moving to Britain in 1990 was for-sale signs everywhere.
Likewise, demand is hardly inelastic. As with every asset, prices are a function of the incomes that support them. When the Imperial Palace was worth more than California, central Tokyo apartments reached 16 times average gross incomes at their peak.
That is not much more than the 13 times in London today. It’s madness to believe the UK is unique. And even if it is, for the country as a whole, the average house is now about nine times earnings, the highest it has been for 150 years, according to Schroders.
Remember too that because houses are a financial as well as physical asset, prices should also reflect the future. So there is no point arguing about a rosy outlook for Australian or US immigration, for example. As with equities, that should already be discounted.
4. “We’ve decided to go to Barbados this winter — our home has tripled in value.”
Lucky indeed, but you’re only minted if you manage to sell your house while prices are high, if you have properly accounted for the cost and time spent renovating, and if you trade down.
Some people are good at finding a bargain. If your home has tripled in value, however, the chances are you will need to buy a house that has also tripled in value after you sell. Sure, your purchasing power has been maintained versus a renter, but in absolute terms you will only feel richer if you move somewhere cheaper.
5. “You know where you are with bricks and mortar — it’s future proof, isn’t it?”
Here I make two predictions. First, flying cars will drastically reduce the price differential between urban and rural house prices. Second, no one will want your flat or suburban home when they can have a mansion by the sea in virtual reality.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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