Balance portfolio and hedge against slide..

Han_naH

It might be obvious to some people, but for those of you who didn't know, property represents just one of the four investment classes.
As such, you should ensure you are not over-exposed to it.
I plotted a bar graph and found a huge bar next to property, but tiny boxes next to equities, bonds and deposits.
When you see it in graph form like this, it really makes you think.

Most people are over exposed in this way, because their home is bar far their biggest invesmtment.

I just thought I would reiterate for all you property-mad people, that you really must spread your capital around the classes and providers. Long term, you are not over exposed to a fall in any one class.

For example, equities more than halved over the years 2000-2003, but the other classes were unaffected. In this sense, they are not linked, giving you protection. Indeed bonds and property benefitted as a result of the fall in shares.

It's all about exposure, not timing, don't you think?

Pal

An interesting point well made. However the issues for most people are a bit more complex.

It might be obvious to some people, but for those of you who didn't know, property represents just one of the four investment classes.

Four? Property, equities, bonds, cash, futures, precious metals, commodities, art, wine......

As such, you should ensure you are not over-exposed to it.

This assumes that you are investing in property as an investment to make money, however most people are buying a home. As such they only own one, and the value of it is largely irrelevant as they have no intention of downsizing or selling to rent at any time in the future.

In addition, most people have mortgages, meaning that if you knock the mortgage amount off the asset price, you get a far more realistic view of the net value. It still may be higher than other asset holdings but that is because of capital appreciation rather than more money being pumped into the housing market. If the house has not appreciated in value since it was bought, the net value of the asset is simply the deposit that was put down when it was bought.

You then have a problem if someone tries to rebalance as you suggest. A house can only be sold in units of one, as it is difficult to sell half a house.

The only way you could spread your capital would be to borrow more on a mortgage and put the money into alternative asset classes. This might protect total paper wealth from a fall in house prices, but will almost certainly expose the individual to other financial risks, not least of which is that the mortgage cost outweights the gain made on the other assets they have bought. I assume that you are not really suggesting that people remortgage their houses to put the money in a savings account just to spread their financial risk on paper?

Your comments are certainly applicable for the very wealthy with lots of spare cash to invest elsewhere. They also apply very much to those who have jumped on the BTL bandwagon over recent years. However for most people a single property is a vital investment and, once bought, the ups and downs of the market can be largely ignored.

In the end it is all about timing if you are not already a home owner. If you already own a home, timing is irrelevant and instead it is about minimising debt so that more of your income can be put into other assets to increase your overall wealth.

Han_naH

Good point about removing the mortgage amount... I'll go and reduce my bar...

You just wrote that for those who own their own house, value is irrelevant. This is nonsense! If they buy and the value plunges, they will be in severe negative equity. This causes big financial problems. This manifests the dangers of piling your money into this investment class.

Also, I wouldn't suggest borrowing money just to be able to put money in each class! You should redistribute your funds even if this means selling.
Yes, there is such a formula as renting or part-own, or downsize. If this is what you have to do to realise a paper profit and redistribute your funds, then this is what you must do. And be firm about it!

I don't agree that buying a house is a vital investment. Tell that to the 20 yr old first time buying couple who then found themselves in 50K worth of negative equity.
They'll be 45 by the time they shift that debt.

Property is simply one of the investment baskets, and a commodity. For others, it is a "home". It is these people who don't take a dynamic approach to this asset (I.e., sell if you must) who sadly get their fingers burnt.

Agree entirely about the BTL brigade.

Pal

You just wrote that for those who own their own house, value is irrelevant.  This is nonsense!  If they buy and the value plunges, they will be in severe negative equity.  This causes big financial problems.  This manifests the dangers of piling your money into this investment class.

Negative equity has little to do with the value of the house. It is a reflection of the amount you borrowed in order to buy the house in the first place. As long as your house value always exceeds the mortgage, the value of your home is completely irrelevant, unless you are selling to rent. From a purely monetary point of view, negative equity is simply someone losing money on investing in a house. That is no different from losing money on investing in shares, bonds etc which are two of the alternatives you were suggesting.

Also, I wouldn't suggest borrowing money just to be able to put money in each class!  

I didn't think that you were suggesting this, as it would be daft to do so, but I thought I would make sure!

You should redistribute your funds even if this means selling. Yes, there is such a formula as renting or part-own, or downsize.  If this is what you have to do to realise a paper profit and redistribute your funds, then this is what you must do.  And be firm about it!

From a purely monetary point of view I can see what you mean, but you are suggesting that people should trade their 3 bed semi down into a small bedsit just to spend the released equity on other investments like equities or bonds. In practice most people would rather keep the paper profit locked away as a safety net against house price changes and enjoy living in the larger house.

I don't agree that buying a house is a vital investment.  Tell that to the 20 yr old first time buying couple who then found themselves in 50K worth of negative equity.
They'll be 45 by the time they shift that debt.

I didn't really mean that it was vital that everyone buys a house. I didn't word it very well. I meant that buying a house is important for most people because it is their home and they have to live somewhere. If they buy and then live in their home for 25 years on a repayment mortgage they will have paid it off entirely, irrespective of what happens to the house price after they have bought. A fall in house price might be annoying, but once you have committed to paying a certain amount, there is really no point in considering the price of your house again unless you are going to sell to rent and try and lock in any profit. It is only people with interest only mortgages, those who keep "releasing equity" by remortgaging, or those who are forced to move (e.g. divorce) who will get themselves into trouble. Unfortunately this is actually pretty common these days.

Property is simply one of the investment baskets, and a commodity.  For others, it is a "home".  It is these people who don't take a dynamic approach to this asset (I.e., sell if you must) who sadly get their fingers burnt.

I agree that property is an investment for BTL investors, but for most people it is a home first and foremost. As long as they are careful not to overstretch themselves and make adequate provision and protection (e.g. mortgage insurance), they will be OK. Selling your home just to invest in other assets is going to be too extreme for most people.

lickrish

Can I arbitrate here between leejp and Pal

For those wealthy or not so wealthy investors, who might like exposure to the Property markets - why not consider a Property Fund as part of their 'Managed Portfolio'.

Unit Trusts; OEICs; Investment Trusts from all Investment houses ('scuse pun) have Property Fund/s which could be: Leased Residential, Office Space, Retail sheds, etc etc.

Neither of you have eluded to an Investor's age, state of health, or attitude towards risk & reward.

'Fred & Doris' might be cautious by nature and thereby Property exposure would be the last thing they need.

However Quentin & Corrina might be speculative by nature and might be up-for-it until the next trendy wave comes along (remember TMT's ??).

I'm inclined to score Pal 7 and leejp 4

Hope this helps
8)

Pal

Can I arbitrate here between leejp and Pal

Yes, you can, but the rest of your comments suggest that you are trying to wind me up!

For those wealthy or not so wealthy investors, who might like exposure to the Property markets - why not consider a Property Fund as part of their 'Managed Portfolio'.

Are you suggesting this as way that a home owner could reducing their exposure to property?

Neither of you have eluded to an Investor's age, state of health, or attitude towards risk & reward.

This is true. I also didn't get around to mentioning the other debts that the individual may have, their current financial committments or their aspirations. Must remember to cover every possible individual's situation in all future posts.

'Fred & Doris' might be cautious by nature and thereby Property exposure would be the last thing they need.

So you are suggesting that someone who is risk adverse should not buy their own home?

However Quentin & Corrina might be speculative by nature and might be up-for-it until the next trendy wave comes along (remember TMT's ??).

Owning your own home is a speculative investment is it?

I'm inclined to score Pal 7 and leejp 4 and Lickrish 2 (zero for content and grammar, plus 1 for spelling and 1 for your score suggestion.) ;D

John_M_Business

In an ideal world, I would have a balanced portfolio of shares, currency, property etc... however, in reality as with the vast majority of people in their thirties living in the real world with money pressures (i.e. young family, childcare costs, less income from spouse, etc.) there is no 'extra'.

Our flat swallows just under half of our joint income and the rest just... goes on everything else. So there is no choice unless we want to 'cash' our home... there is no opportunity to hedge.

In saying that, we have just undergone a very large development of our flat, and have practically doubled it's value by converting the basement, and building a new extension. The ROI for this was about 180%, so we're happy with that (and doubt that any investments could offer that kind of performance over five to ten years, let alone one).

Of course, this does mean that we are 'slaves' to the property market... but that's true of almost all homeowners. The privileged few, who have money to spare, are the minority.

Han_naH

I stand by my original judgement, that it is not necessary to actually own the property, but instead part-own, rent or own somewhere more austere.

If this enables the exposure balance I described originally, then this is the best strategy long term.

There is a well known phrase for this - concerning eggs and baskets.

Pal

leejp - I still disagree, but in case I am missing something obvious, perhaps you could explain your personal circumstances and how you have rebalanced your "assets" away from property?

Pal

In saying that, we have just undergone a very large development of our flat, and have practically doubled it's value by converting the basement, and building a new extension. The ROI for this was about 180%, so we're happy with that (and doubt that any investments could offer that kind of performance over five to ten years, let alone one).

Of course, this does mean that we are 'slaves' to the property market... but that's true of almost all homeowners. The privileged few, who have money to spare, are the minority.

This ROI idea is IMO dangerous thinking for homeowners who have not sold. You are taking credit for a notional investment return before you have sold out and banked the profit. In practice you may never actually bank the profit as you will simply spend it on more housing when you move.

I am not saying that building extensions etc to enhance the value of your property is a bad idea, but that it should only be viewed as paying for somewhere nicer to live, rather than as an investment. In reality I assume that you have borrowed to fund the building work, meaning that you have increased your liabilities and the actual cost of the building work (once you have taken into account the interest that you will pay) is not yet known. As a result even the notional gain in value is unlikely to be accurate.

John_M_Business

But you should also recognise that although the ROI is dependent on 'cashing in', it's just a measure.

In the end, it has made virtually certain, bar even a catastrophe, that we will ever be in 'negative equity'...

Furthermore it has put us on a certain 'rung' in terms of property - even if the value of our property decreases in financial terms, the value in terms of the market won't... we'll still be able to 'afford' the same level of accommodation.

This, in turn, for us means that we'll never need to borrow any more for property in the future, and will have paid it all off in around 20 years.