My post of the week, plus plenty more worth reading across the Web.
I can’t get enough well-argued explanations as to why UK houses are overvalued. These people might be as wrong as me, prices might (or more specifically, ‘do’, at least here in London) go up regardless, but at least you feel you’re wrong with the smart money.
True, that won’t keep us refuseniks warm when we’re 68 and forced to live in some huge commune/squat in Milton Keynes with a bunch of other people who posted evidence of prices falls that never really came at House Price Crash like a middle-class cargo cult.
But heck, you can’t take it with you.
So on the property theme, my post of the week comes from Alan Dick, a financial planner from Glasgow.
Alan writes (apologies for going straight to informal Christian names, but to use his surname seemed provocative):
Most of us apply dubious mental accounting to convince ourselves that we have made a substantial profit on property.
Unfortunately, this is largely an illusion. Much of the so called profit is actually just the effect of inflation. Anyone over 50 probably paid more for their last car than they did for their first house. As house sales and purchases are generally infrequent activities we have plenty of time to put on our rose tinted glasses and ignore the effect of inflation.
Alan has crunched data since 1956 on house prices, shares, government bonds and RPI inflation, which is summed up in the following graph:
Pretty definitive win for shares. It’s worth noting, however, that the mid-1950s was when the ‘cult of the equity’ took off in the UK; I wouldn’t expect share prices to outperform over all timeframes like this (though right now, after two bear markets in a decade, is probably as good a starting point as any).
On the other hand, Alan also offers supporting data from the US and – intriguingly – Amsterdam, where records going back over several centuries for the same row of highly-prized townhouses shows prices rose by merely 0.2% per year in real terms (that is, after inflation) across 350 years.
Houses cost a lot to maintain and update, too, and they’re illiquid.
On the other hand, they have the great advantage of being the only way the average person can safely borrow to invest – provided they pay a reasonable initial price when they do so. It’s the gearing from a mortgage that in fact produces the bulk of the returns for anyone who isn’t lucky enough to buy at the start of a house price boom (most recently the late 1990s, in the UK).
A fair price for property
So what’s a reasonable price to pay? Alan cites the famed US writer William Bernstein’s suggestion of 15x the fair rental value of a property.
That would put my London place I rent at about £300,000, which seems about right – still eye-wateringly expensive, but understandably so given London wages and housing restrictions – as opposed to the £450,000 that similar places around here sell for, which just seems bonkers.
Do download the PDF and have a read yourself (there is good US graph, too, and details of a 100-year bear market for US property!)
p.s. Apologies if you’re used to getting this roundup on a Saturday morning and the email isn’t coming until Sunday. For logistical reasons (no, not a hangover!) I’m having to write around Saturday lunchtime currently, unless I have time free on Friday night. Shouldn’t be forever.
From the money blogs
- Rick Ferri on gold – Canadian Couch Potato
- The trouble with P/E 10 – Investing Caffeine
- Why do we make such a pig’s ear of UK housing? – Simple in Suffolk
- Risk, reality, and Richard Feynman – The Psy-Fi blog
- How the Fed creates money, and where it goes – Weakonomics
- Negative yields are not crazy – Bad Money Advice
- A softer approach to RDR – The Munro Blog
- Farewell to Speenhamland – A Grain of Salt
- On the value of networking – Get Rich Slowly
Morsels from the mainstream financial media
- Investment banking: Mutiny over the bounty – Economist
- Money woes can be early cue of Alzheimer’s – New York Times
- Who’s smartest: Active or passive investors? – Swedroe/Moneywatch
- Have you been misled by returns information? – Swedroe/Moneywatch
- Mortgage squeeze to widen price gap – FT
- A curious trend-following tracker fund – FT
- John Lee loves low P/E stocks – FT
- Bearish Merryn likes QE2 as an excuse for rally – FT
- Oil prices hit a two-year high – Telegraph
- The impact of privatizing the Land Registry – Independent
- Terry Smith’s new 1% p.a. ‘cheap’ fund – Guardian
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