Why property can never be a short-term investment
Guest blogger Sean Oldfield of Castle Trust explains why viewing your home as an investment for the short-term can be a dangerous game.
Historically, residential property has largely been available only to those investors willing and able to purchase a buy-to-let property.
Today, however, the asset class is accessible without the need to buy actual bricks and mortar, in funds or vehicles like our own HouSA, using tax-free wrappers such as ISAs, Junior ISAs and SIPPs. With this development has come the idea that investors can now get in and out of housing easily.
The benefits of investing in residential property
The risk of losing money on an investment in residential property is lower than in equities. Over the next ten years, the capital returns from an investment in the Halifax House Price Index are expected to be similar to those from a basket of UK equities, according to a forecast by actuarial consultants Barrie & Hibbert.
But while there is a risk of losing a significant part of your money over that time if you invest in equities, the Halifax House Price Index has never fallen over any ten-year period.
Investing in residential property is also a great way of adding much needed diversification to your portfolio. Asset allocation consultant Distribution Technology states that “a greater return can be achieved for any given level of risk” by adding housing to a portfolio.
But it's not a short-term investment
Yet there are several reasons why residential property should never be seen as a short-term or liquid investment and should not be treated as such, the way that bonds or equities sometimes might be.
Taking buy-to-let first, landlords generally have their money invested for between three and ten years to cover the costs of buying and selling. Many will also be aware that over the last 30 years there has not been a ten-year period when average prices have fallen. Investors should, therefore, view housing as a medium to long-term commitment.
This makes fixed term – as opposed to supposedly liquid – investments attractive because they encourage a long-term perspective, more in keeping with the investment time horizon for housing.
Second, when it comes to funds, they are not as liquid as they might appear. Investors tend to move in unison. They will try to sell en masse when prices take a downward turn but, if the fund is invested in an illiquid asset such as property, they find they become locked in, only getting the prices that can be achieved for the properties when allowed out.
The idea that an open-ended fund can somehow make illiquid assets liquid is misleading, as anyone who tried to sell a holding in a commercial property fund in 2008 will be aware.
Finally, a fixed term investment can be used very effectively when you have a specific goal in mind, such as retirement planning or when saving for your children’s future home purchase. If you are saving to help your children buy a home, for example, it would be prudent to match your returns to those future liabilities, which means keeping pace with house prices in the meantime.
So if you are thinking of diversifying your portfolio by investing in residential property and comparing supposedly liquid investments with fixed term products, don’t be fooled – property, both commercial and residential is not and has never been a liquid investment.
Sean Oldfield is CEO of Castle Trust
What do you think? Is Sean right? Can property ever be a short-term investment? Our own Ed Bowsher has made clear his own concerns about investing in things like the Housa in I'm avoiding Castle Trust's house price tracker.