Property's equivalent asset allocation

Legacy_user

As a point of curiosity, what ratio of equity:bonds would you reckon has an equivalent performance and risk: reward ratio as the house we live in?

Assume it's an average house, unlet and unmortgaged.

Numbers I've seen, which could be wrong, put average house price inflation at about 5%, and I believe VLS20​ grows at approx 6%, so on performance alone my assumption is that property would be like a shade below 20%

But also what about risk? Is 20ish or whatever % equities a better risk: reward ratio? I could certainly image vls20 being a more obviously economically productive asset
I'm thinking of short term funds, and would use funds to get round liquidity

AnotherJoe

I don't think you can equate the two, there are different risks, including the fact that you can't live in a VLS20 investment, a house has more substantial ongoing cost, there are differences how you can shelter any gains made through the two, and your house is subject to the vagaries of a single sector in a single geography whereas VLS20 is worldwide, so performance of the two will have very little correlation, it's quite likely one will go up when the other goes down.

Especially since there's no such thing as an average house because location is all important. Where I live it's been about 30% a year the last few years, in other areas it could have been more that that, or negative. So the average house might appreciate at 5% a year but it's very unlikely yours will.

System

You could in theory sell and rent &invest - no way would I dump my entire equity into vls20 but it's interesting to try to make a comparison. I think maintenance costs should be deducted against gains as with capital gains, but not bills that you'd have to pay when renting, i.e council tax

However having a mortgage hugely changes the dynamic, making ownership harder to beat, but not unbeatable

I think averaging is all you can do for lack of info and correlation can be ignored over the long term, but not for short term I suppose

AnotherJoe

MatthewAinsworth wrote: »

You could in theory sell and rent &invest - no way would I dump my entire equity into vls20 but it's interesting to try to make a comparison. I think maintenance costs should be deducted against gains as with capital gains, but not bills that you'd have to pay when renting, i.e council tax

There might be no capital gains if you've put the VLS in a tax wrapper.

However having a mortgage hugely changes the dynamic, making ownership harder to beat, but not unbeatable

I think averaging is all you can do for lack of info and correlation can be ignored over the long term, but not for short term I suppose

Unbeatable in what terms?
Hassle?
Risk?
Uncertainty?
Longer term financial gains (unknowable except in retrospect)?

I think its a fair enough exercise, practical or realistic, to compare the gains from a leveraged investment such as a BTL vs longer term saving.

I think it makes much less sense when you are talking about the place you live. Then there are many other issues that cannot be equated with a stock market investment.

Averaging just because you cant think of something better, doesn't mean its a valid approach, the stark fact is that house prices dont appreciate on average, they appreciate according to the local market. Its very unlikely you live in an average house so pretending you do b doesn't make sense.

Plus you dont have to compare the house you live in, vs an investment, you could compare some other house, for example instead of being in a £300k house with no mortgage and a £300k investment in VLS20, how about a £600k house which you'd downsize from in 30 years time same as you might sell your £300k (plus gains) VLS20 investment in 30 years time ?

System

I suppose even for the house we live in we should imagine a rent as if it was btl, because if we sold to invest we'd have to pay a rent, so ownership does yield in that way by saving you a rent

And that totally changes the calculation, making ownership even without a mortgage far better than vls20

I think it is fair to consider what equity you could invest and whether home ownership is the best place for it to be - it's optimal to own with max leverage

AndyT678

I don't think it's relevant or helpful to conflate home ownership and investment strategy. It's a pointless comparison because my house and my investments are designed to do fundamentally different things. You may as well ask whether a dog is better than a car (yes car not cat). I chose to buy the house that I live in based on a number of considerations but investment return certainly wasn't one of them.

So are there investments that would generate a better ROI than my house? Yes certainly, but I cannot reliably identify them and, much more importantly, I don't want to live in rented accommodation where I have no security of tenure and can't change decor or do what I want to the garden.

Should I spend my next £50k on more S&S or a £200k BTL property is a very different question though...

System

I believe you could imagine a financial value on security of tenure and freedom to alter, and ultimately I think we are all deciding that the value of that combined with the relitively secure asset that ownership is outweighs selling up to invest more. I myself have serious doubts about being able to outperform the investment value of ownership and the more fluffy aspects of it do completely tip my decision that way

I believe it can be viewed like a btl with the rent saving, but clearly a more secure and efficient version of it.

Although I do small cap and although I believe leveraged BTL can beat it if leveraged enough, I think leverage is a much harsher risk because you don't simply bounce back from an interest rate rise

My dad sees it as taboo to think about value of house we live in, and that seems to be a British thing, but it is ultimately a saleable asset that I'm not forced to own, so I think it deserves consideration