Whether you choose to buy a house or rent is one of the biggest financial decisions you’ll ever make.

The sheer cost of houses compared to crisps, cars, and fancy shoes means this was true even 50 years ago.

Nowadays you could pay five or six times average earnings to get onto the property ladder. At today’s high house prices – even in the midst of a slump – the risks of making the wrong decision look greater than ever before.

Is there reason to believe today’s levels are justified, or will UK house prices fall?

In the next few posts I’ll explain how we got to today’s high house prices, and consider if there’s any justification for them.

I can’t tell you for sure if or when UK house prices will fall further, but hopefully you’ll feel in a better position to make your own mind up.

Why house prices matter

Most older people (say 50 or over) will tell you that you can’t go wrong in buying your own house.

Few of the older generation invested much money outside their home. The capital gains they saw from rising house prices – even as inflation reduced the burden of their once-daunting mortgage – was beyond their wildest dreams!

A few gnarly veterans do however warn that prices can go down as well as up.

I see both sides.

I know that house prices can go down. But I also think that NOT buying my own home a decade ago was my biggest financial mistake.

True, saving hard for my aspirational loft apartment (hey, I was young!) got me interest in investing, which is my passion now.

Would that be true if I’d bought a flat and spent my surplus income on broken boilers and Banksy prints?

I doubt it. Buying a house would have been a far easier path to wealth, however.

A little knowledge is a dangerous thing, and my knowledge that London property looked expensive compared to incomes and renting kept me from buying. Yet prices still kept rising.

• Friends who bought naively thinking “London house prices never go down” made a killing.

• Those of us who knew prices had fallen before and so could again have paid for it.

Should you care about house prices?

You might ask what does it matter? Why are the British obsessed with property?

After all, you could choose never to buy a house, and to rent all your life. Some people do exactly that.

The huge advantage of buying your own home is that you lock in the cost of living in it when you buy. Once you’ve paid off your mortgage, you only need to pay the cost of maintenance to keep living there. No more rent!

In contrast, someone who rents will need to pay ever rising rents throughout the next 25 years, when they could have been paying off a mortgage – and beyond that into retirement, too.

They’ll also miss out on any capital gains from rising prices, which are especially attractive because price gains on your own home are tax free.

On the other hand, it’s much easier to move if you rent. You don’t have to pay for decoration and upkeep, either, which you can estimate will cost you about 1% of your house’s value over the long-term, unless you fancy living with the equivalent of an avocado bathroom suite for your whole life.

It’s worth noting that the house price indices completely ignore these extra costs of ownership, and also the cost of adding value through loft extensions and other improvements.

Even so, most people have made a good profit by buying a home in the UK over the past 40 years.

Are UK house prices too high?

This is a financial blog, and I am not going to consider the lifestyle benefits of living in your own home in any great detail.

I’m also not going to go into the morality of high house prices, and the fact that young people are disadvantaged compared to the old by endless house price appreciation.

What you want to know is are house prices too high, or will they come down? The rest is personal opinion.

Next part: Historical UK house prices.

Having re-embraced capitalism like only a 2,000-year old culture could do, the Chinese are also getting our traditional diseases of affluence.

No, not chronic obesity (yet) but the other kind of conspicuous consumption, and all its attendant evils.

That rich Chinese consumers like a bit of flash won’t come as a shock to anyone who has been following the earnings of companies with luxury brands.

While doomsters wonder how we’ll ever sell anything to China, firms like BMW, Tiffany and Burberry have been queuing up to load containers returning to Shanghai with our high end tat fanciest goods.

‘Keeping up with the Wangs’ researchers (genuinely!) call it.

Apparently the knock-on effects of judging yourself by your stuff versus your neighbours’ – as opposed to your devotion to the Glorious Chairman – is even affecting Chinese stock portfolios, the Wall Street Journal reports:

Compared to investors in the poorer provinces of China, those in the wealthiest provinces put more of their portfolios in stocks headquartered nearby (presumably because they aren’t tainted by proximity to the rural areas).

Wealthier Chinese investors also trade more in smaller stocks (perhaps because that makes them feel they are “in the know” relative to people who aren’t familiar with these names).

All this demand appears to have driven smaller stocks to steep prices, although high valuations haven’t discouraged wealthier Chinese from continuing to invest.

Quite the contrary: That seems to brand these stocks as a kind of luxury good, making them still more desirable.

Curious as these findings are, they won’t be wildly relevant to many of us (except perhaps Anthony Bolton, as he tries to pep up his flagging China trust). The Chinese stock market remains pretty tiny in the grand scheme of things.

No, this was the bit that struck me:

People in China’s richest provinces already report lower levels of happiness than those in the poorer areas. Extravagant housing prices, traffic jams, pollution and the pressure of constant social comparisons will do that to you.

Despite the sad universality of affluence and envy, I think China is probably a couple of decades away of being rich enough to afford to protest about it.

Then again, given China’s cavalier attitude to pinching our best ideas, perhaps Chinese anti-capitalism will soon go ironic full circle in Tiananmen Square?

Important: This is not a recommendation for you personally to buy or sell any small cap property companies. I’m just a private investor, storing and sharing notes for wider interest. Read my disclaimer.

We’ve seen how most of the UK’s big commercial property companies are trading at discounts. If you believe the pessimism about Europe and the global economy is overdone, then some offer good yields as well as seemingly undervalued assets for you to snap up.

There is also a plethora of small cap property companies and developers in the FTSE All-Share – although fewer than before the 2008/9 downturn, which inflicted several fatalities in the sector.

In many cases the surviving small cap property companies appear to be even more attractively valued than their larger brethren. But with the greater potential of small caps comes more risk, too.

Of the various elements I suggested you dig into when we looked at the large REITs, I’d say you should pay extra attention to management, insider ownership, and any funding commitments or requirements.

For example many private investors follow London developer Quintain Estates, which has residential sites in Greenwich and Wembley, and other assets and operations besides. On a net assets basis, it seems hugely undervalued. It has also attracted the interest of the well-regarded active investor Laxey Partners, which is now the major shareholder.

However I’ve not been able to reconcile myself to the seemingly large amount of money Quintain will need to complete work at its sites (at least when I last looked at them a year or so ago). I did hold the shares briefly, but I sold them for a small loss as I decided I wasn’t very comfortable.

Similarly, while I’ve owned shares in the first three of the following six firms at some point or another, I don’t currently hold any of them, as I’ve reshuffled the active portion of my portfolio to try to take advantage of the ongoing volatility (remember: don’t do this at home!)

Small cap property companies I like

I think all these companies have some attractive qualities and good potential, but obviously also risks. Please remember to do a lot more research before even considering investing – these are just jumping off points for further research.

Mountview Estates: This interesting company buys residential property that is blighted by legacy rent controls. (Blighted from our perspective, not the tenants’!) These rights eventually lapse with the death of tenants, and the property can be refurbished and/or resold. Mountview is potentially a very undervalued play on residential property paying a reasonable 4% yield, but you’ll have to think long-term.

Daejan: A family dominated FTSE 250 firm with residential and commercial property interests in UK and the US, especially London. Very steep discount to NAV (it’s priced at 0.5x book value) but the dominant family aspect and the more second tier assets it holds (in my personal opinion) means it very rarely trades at a premium. Perhaps also worth considering for the great long-term dividend record, though the starting yield is only 2.8%. Suffered recently in the fall out from the collapse from Southern Cross care homes.

Mucklow: Sort of a mini-Segro at £180 million but mainly focused in the Midlands region, Mucklow is another conservatively run family affair with a superb dividend record. The yield is currently 6.2%. I held until a few months ago, when I swapped it for something more volatile that has since fallen. The sort of company I should try to tuck away for the long term.

Panther Securities: A £52 million small cap run by wily veteran Andrew Perloff, who is noted for his hilarious and strident annual reports as much as his good long-term results. Almost like investing in a private company run by your clever uncle. Horrible spread, so try a limit order or a ‘real’ broker.

McKay Securities: Another £52 million outfit, this time focused on commercial property in the south east and around London. It’s priced at 0.6x book value but there’s around £120 million of debt, secured against just under £220 million of assets. That looks a bit precarious, but the managers do inspire some confidence. They didn’t raise cash in the downturn, and they recently spent £2.7 million on a new modern office in Bracknell that is being let for a yield of over 12%, even though it’s not yet fully occupied. Risky but could be very rewarding.

J Smart: An even smaller cap property developer with plain speaking management. It recently issued a mild profit warning as occupancy levels fell and construction remains subdued. Looks cheap, but under the cosh and will need a turnaround in UK PLC to get going.

Finally, a reader asked about commercial property investment trusts. The only big one I’ve ever invested in is £700 million F&C Commercial Property. It’s on a small 6% discount and pays a 5.8% yield. I suspect it’s becoming popular with income seekers at present, though that’s just a hunch. About four-fifths of the portfolio is in London, with the rest spread about the UK. As with nearly all property companies there’s a fair bit of debt, with gearing near 30%.

Of course, mainstream investment trusts might also invest in commercial property. The currently much-hated Caledonia trust has money in London & Stamford and the aforementioned Quintain, for example. Beware, Caledonia’s shares languish on a 25% discount, so while I continue to hold myself, the market clearly doesn’t think much of its manager’s judgement!

Final warning: All small cap property firms are likely to suffer badly if there’s a renewed and prolonged UK recession. I still don’t expect that myself, but the odds have undoubtedly risen sharply in the past six months.