As the small print in the ads in the Sunday supplements says (and I paraphrase): “The value of your investment is not guaranteed and may go down as well as up”, often adding the proviso that investors should be prepared to keep their money tied up for at least five years.
The idea is that that the periodic peaks and troughs which the stock market experiences will be smoothed out over time and provide investors not only with a real return but one that is substantially greater than had the money been placed in an interest-bearing savings account.
Of course the real winners are those with the time and ability to successfully “play” the market by buying shares when they are under-priced and then, after recovery occurs, anticipating when the price is about to fall back – and selling before it does so.
Frequently performing even better than shares – at least in Great Britain – is of course, property, but in this respect most home-owners do not play the market. They are the equivalent of arm’s-length investors in the stock market who pin their hopes on the skills of a fund manager to provide an acceptable return over time, foregoing some of the more spectacular gains to be made if they were able to take a more hands-on approach.
To diverse for one moment, I do know of some individuals in Edinburgh who have bucked this trend. Born and bred in the city, they started adult life on the first rung of the ladder with a relatively inexpensive property in a mediocre location but armed with local knowledge and native instinct regularly “traded up” their main home just when they believed it was the right time (in market terms) to do so. The constant house-moves did, of course, cause their families some inconvenience but the end result has seen them, eventually, secure a substantial home in one of the capital’s most-favoured districts.
However, while the average home-owner decides to put a property on the market hoping to make a surplus, he or she does so for various other reasons, e.g. birth, marriage, divorce, death, desire for a garden, change of job – even failure to get on with the family who live next door.
Consequently, the substantial rise in house prices over the past 18 months is really a by-product of this inbred social desire to move home for lifestyle reasons. Unless moving to the other side of the world, clients tend not to come into my office and say: “We want to sell our house because we think we’ll get £50,000 more than we paid for it”.
By-product or not, this rise in prices must be of some concern. Property agents have longer memories than the general public and can recall how in 2008 – and almost out of the blue - a financial crisis saw hundreds of thousands of home-owners move into negative equity while substantial numbers also lost the roof over their heads into the bargain. Over-optimistic mortgage deals, like a loan-to-value of 125 per cent, were largely responsible; thankfully these are no longer available but the current trend does seem to be towards ever-cheaper mortgages just at a time when there is likely to be a sharp U-turn over negligible interest rates.
Let me clarify: I do not foresee a slump akin to 2008 or anything that comes close. A house bought several years ago and placed on the market tomorrow is, on balance, still likely to secure a tidy profit. But, especially given what’s happening in the wider economy, I do not see the rate of price increase over the past 18 months being sustained for very much longer. Therefore if you are thinking about moving – for practical/household/family reasons – it might be wise to do so sooner rather than later.
David Alexander is managing director of DJ Alexander