Brits are often described as having an “obsession” with home ownership. This attitude is rooted in the experience of the past few decades which saw property prices soar. For example, looking back over the last 25 years, average UK house prices have risen over 200%. In a recent survey commissioned by JPMorgan, almost 60% of respondents expected house prices to rise by more than this in the next 25 years.
The extraordinary house price growth that we have witnessed has contributed to a mindset that housing is the best way to accumulate wealth. Therefore, the question as to whether this is the case is a pertinent one.
We don’t know where house prices will go. However, there are some question marks as to whether we will see such extraordinary growth in house prices continue in the future.
This is all to say that you may have benefitted from your home already appreciating in value, but we would caution about expecting the same growth in the future.
But this is not the full picture.
When you are living in your own home
Whilst you are living in your own home, unless you have a lodger or are letting it out on platforms like Airbnb, you are not monetising the asset.
In fact, you are likely to be experiencing quite a few outflows linked to your home for bills and repairs. Some of these expenses would be for running the home, others could be seen as “investments” (such as installing new windows) in the hope that they would add value to the property.
Controversially, in his book Rich Dad, Poor Dad, Robert T. Kiyosaki presented the idea that a house could even be a “liability” – something that creates cash outflows, as opposed to inflows.
The bottom line is that whilst you are living in your own home, you cannot easily convert it into cash. To do so, something would need to change – for example renting it out or selling it.
Downsizing and living on the proceeds
Some people view their homes as a “pension”, with the dream of downsizing in the future and living off the remaining proceeds. This strategy highlights some of property’s key characteristics.
It’s illiquid
It is difficult to convert the property into cash. Firstly, you cannot simply chip away at it. For example, if your home is worth £500,000, but you only need £50,000, then it’s not easy to take just £50,000 out of the property (unless you borrow against it or go for something specialist like equity release). It’s very often a “sell all or nothing” situation.
Secondly, it may take time to sell the property. This might not align with your own timings; for instance, you may wish to retire in six months, but the property is taking longer to sell so you keep on working.
There could be a scenario where you (or your beneficiaries) are a forced seller, where selling the property quickly becomes more important than the price for which it is sold.
It’s also worth noting that the transaction costs of selling and then buying a property can be high. These include fees for the estate agent, surveyor and solicitor, as well as taxes (most notably, stamp duty).
It’s bulky
Buying a property requires a significant financial commitment. Often, a substantial sum goes into just one asset. It’s a “putting your eggs into one basket” approach which can be a risky strategy. There could be all manner of events that could be specific to your property, street or area that could negatively impact the value of the property so that when you come to sell it, it might be worth less than what you wanted.
When we look at UK households’ wealth, around half of it is tied up in property (compared to around a quarter in the US). This shows that the wealth of UK households is heavily concentrated and reliant on housing.
It’s emotional
Not to be overlooked is the emotional bond we can form with our homes. Downsizing may sound like a good idea in the future, but when the times comes, it can be a very difficult thing to do.
Conclusion
We rarely (if ever) create a plan that relies on downsizing as the main source of funding a client’s lifestyle. Homes are illiquid, bulky and we may have a strong sentimental attachment to them.
Although we have seen very strong growth in house prices over the last 25 years, we would caution from expecting the same to continue.
At Raymod James, Fulham, we focus on building wealth through the stock market, collectives and defensive investments such as government bonds. These tend to be liquid i.e. usually they can be sold within a few days, and you can sell just a portion of the investments (no need to sell all of them at once). They are also not bulky meaning that we can create a broad basket of investments so that there is no reliance on one single asset.
If you would like to discuss how you could build your wealth, please don’t hesitate to get in touch.
Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.