It’s often said that we’re a nation obsessed by property, and over the last decade, inspired by Location Location Location, we became a nation of property entrepreneurs.
But how successful has our love affair with property been? Actually the returns look reasonably healthy over twenty years. Taking Halifax monthly house price data, the average house price has increased by 4% per annum between January 1991 (£69,098) and December 2012 (£163,256). Add to this a potential rental yield of 3.5% (after accounting for property management fees and maintenance costs) and you end up with total return of 7.5%, which isn’t too shabby. On the other hand, it is considerably less than might have been achieved from a broadly diversified portfolio over the same period. For instance, 9.69% annualised for PN 5 Growth (net of fund charges).
Moreover, the property return was not achieved without risk. From a diversification perspective, an investment property is akin to putting a rather substantial egg in one basket and you can only hope to avoid issues like subsidence or being the unlucky property owner that has to replace the roof. By comparison a Paradigm Norton portfolio contains over 10,000 underlying securities so if Lehman Brothers goes bust you have plenty of other holdings to fall back on. There is also liquidity risk to consider: for example, one of my clients decided to sell their investment property to remove unnecessary ‘hassle’ from their life but the house is still on the market two years later. Yet another risk is void rental periods, which is a bigger problem still if there is a mortgage to pay on the property. I can’t help but mention another unfortunate client who had squatters occupy his property for several years!
Of course, not all clients buy property as an investment decision. For many it is a lifestyle choice, a holiday property being a good example, but that too is not without disadvantages. One example is the loss of freedom to holiday widely and explore new places. There is also a very large opportunity cost of tying up capital in a holiday property that is infrequently used.
One final thing to remember is that the property return took a great deal of time and effort to capture – you have to run a small business to obtain your 7.5%, keeping accounts, dealing with agents and filing tax returns. Not exactly an example of an uncluttered and simple life, which is what the majority of high-earning, time-poor clients tell us they want.