Why do people advise to invest in property?

Thrugelmir

jimjames wrote: »

Investing in property may have short term fluctuations but rents will normally keep pace with inflation.

Wages rises are not keeping pace with inflation pre tax let alone post tax. So difficult to see rents achieving this going forward.

Thrugelmir

Gromitt wrote: »

Compare this with the 95K I spent on a property last year at auction. I spent 5K on it and sold it for 120K. All done and dusted within 7 months. Show me a savings account that pays ~40% AER and I'll gladly take one out.

Not many people have a £100k in cash lying around to speculate with.

opinions4u

Gromitt wrote: »

I do have money in savings accounts, but you've got to agree, the current interest rates don't even match inflation, so by keeping all your money in a savings account, your actually losing money.

Compare this with the 95K I spent on a property last year at auction. I spent 5K on it and sold it for 120K. All done and dusted within 7 months. Show me a savings account that pays ~40% AER and I'll gladly take one out. If I wanted to be a land lord, I could have possibly rented it out and made more money over a longer period of time, but thats not my thing.

Have you declared your CGT yet?

Glen_Clark

UK house prices depend on politics. If they relaxed planning restrictions and normalized interest rates, house prices could crash 75% in some places. But powerful vested interests are against that.
Like so many things, you really need inside information to know, if not influence, what the politicians are going to do.Why do you think so many bankers and lobbyists hire (ex) politicians?

Thrugelmir

Glen_Clark wrote: »

UK house prices depend on politics.

I would have said mortgages.

Gromitt

opinions4u wrote: »

Have you declared your CGT yet?

Yes, had to pay 28% of the profit, which was pretty cheap at just over £2600 I think it was, thanks to not using up my CGT AEA that year.

Glen_Clark

Thrugelmir wrote: »

I would have said mortgages.

Well, as long as government restricts housing supply by limiting house building, I guess demand is the only variable.

Totton

Commercial property investing is another option

bowlhead99

dunstonh wrote: »

Savings are subject to shortfall risk and inflation risk. Investments add in investment risk but are more likely to avoid shortfall risk and inflation risk.

I have a question. For long-term goals I am definitely a fan of 'investing' rather than 'saving' because there is no such thing as a free lunch: if you are not willing to take any risk, there is no reason for anyone to pay you a real return- whereas if you have a diversified set of investments which are at risk, you have to suffer volatility but if you can afford to ride it out, there are rewards to be had.

It's common sense that the average worker can't just work 34 years from 21 to 55, only save a small proportion of their salary at zero real return, and then expect to support themselves 50 years from 55 to 105 without any earned income. The maths does not add up and that is why people suggest seeking a better return through taking a risk on property, stock market, etc etc.

Thing is, everytime a naive poster refers to a 'risk-free' bank account, certain other members will jump on them with: "no you idiot, there are two risks with cash- shortfall risk and inflation risk". Dunstonh has said this many times and is a prolific poster so probably knows his onions...

What I don't get is quite how is this situation, two separate risks that don't exist elsewhere? Inflation risk I presume is the risk that inflation erodes your returns such that the future value of a pound is lower than the present value of a pound? And shortfall risk is the risk that the total pounds you get back are not enough to meet your goals?

Could it not be argued that the shortfall risk -risk of the return not being great enough for purpose- must be higher with anything other than cash savings, because only with cash can you get a known amount of return and near-100% security through FSCS. If 2.5% is your target for the next few years, the risk of falling short of this might be 40-50% with equities or bonds and zero with cash savings.

Clearly a return of 2.5% will not be enough for most of us but a bland statement like "cash has shortfall risk" just seems like a "No sh1te, Sherlock" comment ; over a reasonable period like 2012-2022, every investment has the chance of producing a return that falls short of your target. Obviously if the average long term cash return is 3% and equities is 7%, and your desired return is >3%, you would be better off not staying in cash. But shortfall risk is not unique to cash.

Granted, 2.5 % is useless as it probably won't top inflation. The inflation is an unknown as nobody knows what it will do to your future cash. But one could say that if your 2014 pound is worth 100/103 of your current pound, then this fraction applies to all your future cash whether you earned it from your job or house or equities or savings. Equities and house prices can move dramatically in the opposite direction from inflation (see: various UK and US recessions) so it's fruitless to imply cash has some sort of special inflation risk that houses or equities or government bonds or commodities don't have. The only problem with cash is that being risk free its returns are very low and so less likely to beat inflation, but we already covered low returns in exchange for low volatility in the first (shortfall) risk?

I totally understand that a portfolio of company shares paying a 4% dividend yield in a growing economy is perhaps a more inflation-proof bet than a 4% bank account, because the share price or market cap on which the 4% divi is based will hopefully keep pace with inflation so the income automatically rises in pound terms, while the 4% bank account can only go up when you reinvest your interest. So shares give better long term rewards than cash if you can live with the volatility and risk of wipeout. Yeah yeah we know, we covered this in discussion of shortfall risk, right?

Sorry for the very long post. But what am I missing here? We say there are two separate things wrong with cash savings over real estate or equity investment? To my mind, there is only one: ïf you just want an FSCS or govt guaranteed return and aren't willing to take a risk participating in the up-or-down valuation performance of an economy (the companies, properties or other assets within it), you run the risk that the real return is not going to be as big as it could have been if you'd been willing to participate in those risks and so the shortfall against your future needs will inevitably be higher than if you had taken those risks. It's more of a mouthful but I think it works?

Linton

bowlhead99 wrote: »

I have a question. For long-term goals I am definitely a fan of 'investing' rather than 'saving' because there is no such thing as a free lunch: if you are not willing to take any risk, there is no reason for anyone to pay you a real return- whereas if you have a diversified set of investments which are at risk, you have to suffer volatility but if you can afford to ride it out, there are rewards to be had.

.........
Sorry for the very long post. But what am I missing here? We say there are two separate things wrong with cash savings over real estate or equity investment? To my mind, there is only one: ïf you just want an FSCS or govt guaranteed return and aren't willing to take a risk participating in the up-or-down valuation performance of an economy (the companies, properties or other assets within it), you run the risk that the real return is not going to be as big as it could have been if you'd been willing to participate in those risks and so the shortfall against your future needs will inevitably be higher than if you had taken those risks. It's more of a mouthful but I think it works?

To summarise, I think you are seeing the shortfall risk in cash savings as a different sort of beast than say the volatility risk of equity or inflation, as it is something that can broadly be predicted and planned for in advance. The low returns are a feature not a risk.

From a logical point of view that could well be argued. Similar arguments could possibly be made for distinguishing any of the other risks.

However there is a practical advantage in regarding it as a risk. That is that all possible repositories for your money can start off on an equal footing with their individual risks and you have a allocation decision to make to provide an overall risk balance with which you are happy. You do not have to decide in advance that savings are right or wrong for you. You can make a rational decision that savings are right for a calculable % of your money but would be too risky, because of shortfall risk, for all.