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I was in the park with my son over the weekend and got chatting to a lady looking after her grandchildren. After a few minutes the topic of conversation turned to house prices, “haven’t they shot up in the area” she said. The lady went on to tell me she had bought her house in 1976 for £16,500 and it was now worth over £500,000. “What an amazing investment it’s been!"

This lady is not alone in her thinking, since the ONS started surveying on favoured investment vehicles in 2010 [1] pensions and property were identified as the two most favoured methods of saving money. Property came out on top by a significant margin, favoured by almost half of respondents. The attraction, whilst surprising to an extent, is understandable. We Brits love our property and when we see anything showing good growth over the long term we believe the future will follow the recent past. But is it actually a good ‘investment’, or more importantly should your home be viewed as an investment?

Here at Equilibrium, we believe that a well-diversified portfolio across multiple asset classes and tax wrappers is important to achieve long term investment returns. But, there is still an attraction to single or direct investment, and we often find that property is one such direct investment that our clients still value. Whatever the reasons for this type of direct property investment, they must be approached with caution and here are a few reasons why:

  • If anything goes wrong with that one asset class, however unlikely, the ramifications could be severe. Placing all your eggs in one basket is a risky strategy. Diversification is a tried and tested path for long term investors.
  • Ignoring employer pensions as an investment vehicle over property investment or holding other direct investments could be a huge risk as you are losing out on the possibility of the double benefits of matched employer contributions and tax relief.    
  • Property owners tend to have more than one plan for their property, such as a place to live, a source of retirement income, a legacy to the kids and a means of paying for care. In that situation there needs to be a lot of house to satisfy all of these potential needs.

Of course, house prices, like all other investments, will go through periods where performance will fall as well as rise. We don’t need to look back far in the past to see the effects falling house prices on our investment returns and on the economy. If you make a direct investment into property, be this a buy to let investment or if you are just looking to purchase a property as your main residence, no one is likely to send a quarterly statement showing the loss in pounds and pence.

Clearly in this case, the house has provided a roof for over 40 years and was purchased to be a home, rather than for the potential investment return it offered. Whilst this lady can, and should, be very happy with the increases above inflation her house has enjoyed, I believe in viewing a home as just that, a home.