In today’s Exponential Investor:
- Aussie property experts
- The real costs of property
- Why I think property is not a great investment
I’ll be straight with you: I know a thing or two about property prices.
Yes, I’m aware that my speciality is tech investing, crypto and small caps, but I’m also an expert on house prices.
That’s because I’m Australian.
Hear me out…
In Australia, property prices are a national pastime, and have been since the beginning of the millennium.
This is because the Australian property market has experienced a multi-decade-long boom like nothing you could feasibly comprehend.
In the last ten years alone, the value of the Aussie residential property market has risen from just over $4 trillion to well over $8.1 trillion. That’s four times the size of the country’s national GDP.
It’s still only a fraction of the UK market, which is worth over £9.2 trillion, but for a tiny little country a few thousand miles away, to even be close to the UK in value terms is some indication of the speed and ferocity of Australia’s housing bubble… well, perhaps not so much a bubble, since it has endured for some 30 years now.
Nonetheless, having lived for 30 years in a country obsessed with how much your property is worth, and where every young punter aspires to be a property developer, I can see signs of the incoming social dynamics hitting the UK…
… and it’s not pretty.
The old grey mare ain’t what she used to be
Property prices and property values are fast becoming a national obsession here in the UK, too. Having been here for almost a decade, I’ve seen first-hand the rapid change in perception of property and the segment’s dynamics.
Sure, everyone wants to get on the property ladder. People want the security and surety of having their own roof over their heads. But most houses belong to the bank in reality, or, if push comes to shove, to the Crown (or Commonwealth).
Anyway, that aside, there’s something tangible about property that evokes the most fervent debate and defence of one’s most expensive asset. Tell a man that his property is not worth as much as he thinks it is and you’ve lost a friend for life.
But the reality of property is far different to the perception.
And what’s coming down the pike in the property market isn’t very appealing.
The reports currently that you’ll see around the mainstream are that “property prices are rising fastest in 17 years”. People will start to think and feel that they’re rich!
Some might be. Some might be sitting on a million-pound property ready to bathe in cash. Investors might start looking at the market as a great place to get a rental property, see that rental income flowing in, cash money to be made and capital gains galore.
Whoa! Slow down there, Nelly. The market ain’t what you think.
The headlines are there to mislead you. The actual dynamics of the housing market aren’t so straightforward. The value of your home doesn’t always go up, and even if it did/does, you have to consider that the whole market is rising, too, and therein lies the fundamental problem with buying and directly owning property.
It’s one thing to own an asset worth a lot of money. It’s quite another to realise the wealth tied up in that asset.
What most people don’t factor in with property is liquidity. Property isn’t easy to sell. It takes time, and time is money. Time is opportunity cost. Not only is selling a house an illiquid process, so is buying one from someone else selling it.
And then, even if you have a property on which you are going to realise wealth, what are you going to do next? Most people on their way up the property ladder doesn’t reduce the value of their borrowings.
The total outstanding value of all residential mortgages in the UK was £1.613 trillion at the end of 2021.
Compared with £1 trillion in 2010, you can see debt levels have increased, supply has restricted and, according to UK finance, cash buyers have remained consistent over time.
If people were extracting wealth to cycle through the property market, we would expect cash buyers to increase, and growth in overall debt wouldn’t have continued to move sharply higher based on supply constraints.
In short, people are building wealth in property fuelled by more debt, not realised wealth. This is the description of a continuously building bubble of overexuberance.
Also, the current house-price-to-earnings ratio (the value of property as a multiple of earnings) in England is around 9.05 times. That means the median house price is around 9.05 times the median income.
However in 2004 – back when prices were rising fast too according to the media – the price-to-income ratio was down, at 6.6 times. So, yes, prices are rising fast again, but this is also a much larger burden on household incomes.
Let’s also not forget rates are on the up. Ditto the cost of living. And yet property prices continue to rise too. Not everything can go up at once… at some point, something has to give.
Where the pain hits and where the opportunity lies
Looking property costs further, you have to pay agents fees, legal fees, moving fees, then you’re looking at revised council-tax bands, energy costs and the normal cost of running a home.
And if you’ve got a rental, there are agents’ fees, maintenance and repairs, the pitiful tax treatment of rental properties and, the most important cost of all – the cost of the hassle, stress and time of running it all.
In my view, right now this all combines to make direct property for investment purposes the most diabolical waste of time, money and effort at present.
I’m not against all property as an asset class for investment. I think that, if you want to invest in property, then you should be looking to real estate investment trusts (REITs) or property ETFs (exchange-traded funds).
These all give exposure to property – some residential, some commercial, some both – without all the ancillary costs and hassle of direct property. You can get exposure to the potential gains in the market without all the other junk.
Even buying virtual property in the metaverse has less hassle and cost and can deliver better yields than physical property, though it’s certainly a bridge too far for some.
But direct property for investment? Nope. The headlines might make it sound like there’s nothing but blue sky ahead for residential property in the UK.
I don’t see it that way. I see a crunch coming. I see a near future where the costs of property quickly turn this mini boom into a deeper crisis that will push the whole country into a recession.
And if that’s the case, you want to make sure you’ve got a solid footing, that you’re not overextended, and that you’re very ready and willing and able to make moves in the right kinds of markets to secure and build your wealth.
The next time you’ll hear from me I’ll be diving deeper into how things will look if the UK does head into a recession soon and what you can do about it now.
Editor, Exponential Investor