House Prices Continue to Surprise

Despite the best efforts of the government to rebalance the economy over the last few years most of us continue to measure our wealth in terms of house prices. Many commentators had predicted a sharp fall in prices, but in fact the ‘average’ UK house now costs £233,061, the latest rise taking prices above the February 2008 peak, according to the recent LSL Acadametrics survey.

Ignoring the incredible double-digit rise in London and a buoyant market in the South East, parts of Devon and Cornwall rank amongst the best performing regions over the last year.

Whilst there is no such thing as an ‘average’ house and low transaction volumes may undermine confidence in these results, the resilience of house prices should be welcomed. Millions of homeowners have most of their wealth tied up in their home, so this news helps to support consumer confidence and an economic ‘feel-good’ factor which tends to radiate to other parts of our economy. As the banking crisis lingers on with the Co-Op Bank the latest victim requiring a rescue, it is unsurprising that people should favour bricks and mortar as a safe haven.

I always encourage clients to distinguish between their home and other property investments. A home costs money to maintain and tends to have emotional connections as somewhere to live, so should not be seen as a source of profit. This is very different from an investment property where comparisons can easily be made with shares or other assets. Many clients are tempted at the moment by rental yields that compare favourably with interest on cash and the hope of further rises in house prices, particularly with the support of the government’s ‘Help to Buy’ scheme.

Whilst returns on property can be attractive, it is not without risk or hassle for the uninitiated. Often assumptions are too optimistic and make no allowance for a property standing empty, problems with tenants, management expenses, maintenance, insurance and tax. Furthermore, there are significant purchase and sale costs and a sale can take time.

I am seeing a growing number of professional landlords with a portfolio of diversified properties supported with appropriate finance. In addition to conventional buy-to-let housing, it may include student lets in Exeter or Plymouth. There is also an increased interest in semi-commercial buildings, such as ground floor shops with flats above, which can offer superior rental returns. Whilst residential property cannot be purchased with pension monies, many business people are keen to consider using their pensions to invest in commercial property.

Of course, the basic rules of diversification apply to property as with any other investment, so I would always encourage clients to balance their property exposure with cash, bonds and equities as appropriate. Such an approach is the cornerstone of successful financial planning and achieving attractive returns over time.

[Matthew Clark, Western Morning News, 20 June 2013]

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