Why Invest in Property?

Posted:Abigail Andrews - Wednesday, April 11th, 2007 at 8:23 pm.

THE HOUSING MARKET IS GOING TO CRASH!!!!

Did you find yourself agreeing with that statement? If you did, perhaps you should read this article. Ultimately, there are many reasons put forward in arguing for a property market may crash, however, in this article I point out why it is unlikely. Remember, a correction in prices is different to a crash, a correction is likely, a crash is unlikely. This article is simply my opinion and I could easily be wrong, but you may find it interesting reading.

What do the so called Property Experts say?

How many times have we heard the so called "experts" warn that Britain's massively inflated property market is about to crash? Experts have been predicting a painful end to Britain's housing price boom for years, and have got it wrong time, and time again! Of course, eventually they will be right. It is inevitable that one day there will most likely be a crash, it is simply in the nature of the market, however, some of these experts have been predicting the crash for years and it is likely some of these experts will say, "told you so", even if the event comes 3 or more years after their initial prediction!

Britain's Booming Property Market

It is fair to say the first step on the housing ladder is getting further and further out of the reach of first-time buyers, but should we be worried by that? Well, yes! Are we paying too much for housing? Absolutely! Does that mean a crash is just around the corner? Not necessarily!

No matter what anyone says if you want steady growth over the long term you are best putting your money into property. To prove the point, here is a simple test. Ask your grandparents and parents what they paid for their houses when they first bought them all those years ago. Do you wish you could buy a house for that now? Has it doubled in price over 20 years? I bet it has tripled, no, quadrupled, no..... ok, I will stop there, but only because I don't know what the next word is for increased by 5 times is ;-) But I bet it has!!

Ok, so many people would argue that if the original price of your grandparents and parents house was adjusted for inflation there would be a very different picture painted. I will argue against this point during this article, so keep on reading.

Property - A Wise Investment?

Many people have become disillusioned with traditional pension plans based on stock market investment returns, and have turned to property investment as a future pension fund. Lets look at some figures which explain why.

The graph in Figure 1 below takes the average house price for each quarter since 1974 and adjusts it for inflation. It therefore shows 'real' house prices as opposed to nominal. Adjusting for inflation means that we can compare the rises and falls in the price of houses with those of other everyday items which we purchase. It reflects the sharp falls of the early seventies, early eighties and early nineties. However, remember this is "average" house prices for the whole of Britain and not all areas were as badly affected by the falls as the graph suggests. Where the graph suggests 30% plus reduction many places only fell at most by 10%.

Those who argue against property investment would say the graph shows, if you bought a property in 1989, in real terms, you would not have made a profit until 2001. I, and those in favour of property investment, would say, property is a long term investment, buy it, hold it for at least 20 years and you will make a profit, the graph proves that too. Furthermore, at some points in history you only had to hold the property for 5 years to make a fantastic profit. If you bought a property in 1985 and sold in 1989 the average property grew by £30,000. Again, in 2000, look how much you would have made by 2004, £65,000 in real terms! Statistics can be argued both ways. Property is the same as any other investment, prices do go down as well as up, however, in the long term property always gives you an excellent Return On Investment (ROI). And that is the KEY, property is "usually" held for the long term to make worth while profits.

Figure 3
Source:www.in2perspective.com

Why the "Property Doomster's" Could Be Wrong

I don't listen to the Property Doomster's. Put it this way, if back in 2002 you listened to those "experts" who claimed a housing market tragedy was just round the corner, you would still be sat there now waiting to buy your first property and absolutely kicking yourself for listening, as prices have nearly doubled in the time!

For all you Doomster's out there, and again this is just my opinion, I could quite easily be wrong:

• Britain's population is increasing,
• people are living longer,
• immigration is at record levels,
• divorce rates continue to rise and so too are single parent/person households,
• Britain is building less "housing" now than it ever has.

All of which are inevitably creating extremely high demand for housing.

A Housing Shorage?

We build very few new houses today, though it does not seem that way (see figure 2 below), and we are running out of land on which to build them on, remembering Britain is a relatively small island. These are not the conditions in which property markets implode. It's very upsetting for the millions of young adults who yearn for their own place, some of which are family members of mine, but, when so many people want the market to crash, it simply won't - because there are simply too many buyers willing to jump in just as soon as prices fall!

Figure 3
Source:www.in2perspective.com

The graph above may surprise some of you. It actually shows that we build fewer houses (inc apartments) today than in the fifties. Around 200,000 new homes were built in 2004. This is down from a post-war peak of over 400,000 per year in the late sixties. This graph assists in arguing the point that there simply is not enough housing for an ever growing population shown in figure 3 below.

Figure 3
Source:www.in2perspective.com

Britain: A Property Obsessed Nation!

Its deeply ingrained in British culture to "OWN" property, many people don't in other countries, choosing to, or being forced to rent instead. In Japan, Germany and France, for example, it's simply not affordable, many people have no choice but to rent. Only when we dump our property fetish, stop the property snobbery, and decide that long-term renting is more sensible, will the support for the market crumble.

If the Doomster's are right and the property market crumble's, or the attitude to owing property in this country changes dramatically, what does that mean? Well, people have to live somewhere, if they don't want to or can't buy, then what will they do? They will rent of course! It means those of you who have invested in property will be quid's in! And as there will be so many people wanting to rent you will have very few rental voids. For now, argument over...it's only my opinion, we can only wait and see, but if you decide to invest your hard earned cash in property as a long term investment, like I do, then good luck, and in my opinion, you are making a wise choice!

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