House Buying Myths

Why are people in Britain so obsessed with buying houses? I would like
to expose some of the gravest fallacies behind our house-buying
culture.


1. Rent is dead money.

So is interest repayment+maintenance+insurance. In a competitive market
the cost of those three is equal to the cost of renting. According to
The Economist renting in central London is cheaper than buying.

2. House prices can only go up.

The number of houses is more or less constant. So is the population.The
only factor that affects house prices is demand for new homes. This
demand cannot go up indefinitely. There will always be bubbles, but in
the long term house prices should be more or less constant.

3. A house is one of the safest investments there is.

Wrong. A basic rule of prudent investment is to diversify. Putting all
your eggs into one basket (a house) is less safe than spreading your
investment over shares, bonds, gold, land, real estate funds, etc.

4. A house is more lucrative than the stock market.

Quite the opposite. The housing market is a zero sum game, the stock
market isn't.
Investing in a high tech company can lead to invention of new
technologies, which create real new wealth. The total amount of wealth
contained in the housing stock is a constant. A company can grow
1000-fold in 10 years. A house is still just a house after 10 years.

5. If you get your foot on the property ladder early, you'll be able to
trade up.

Again, the housing market is a zero-sum game.
"Trading up" does not generate new wealth in the economy; it is always
at the expense of others. This so-called "property ladder" is in fact a
giant pyramid scheme. In this gamble some of us will inevitably loose.

In short, renting is ok if you want flexibility, buying is ok if you
want a long term place to live in and the freedom to paint the dining
room orange. But as an investment a house is a lousy choice.

Re: House Buying Myths

On 24 May 2006 14:41:23 -0700, wrote:

>There will always be bubbles, but in
>the long term house prices should be more or less constant.

Strange, then, that the house I bought in Surrey last year has
increased in value by a factor of over seven hundred since the man who
built it in 1936 sold it for £550.

Regards,
--
David Uri.
(remove VEST to reply)

Re: House Buying Myths

<> wrote in message
news:

> 2. House prices can only go up.
>
> The number of houses is more or less constant. So is the population.The
> only factor that affects house prices is demand for new homes. This
> demand cannot go up indefinitely.

Except - since the dawn of time - they have done just that.

---
Sam

Re: House Buying Myths

I was talking about real house prices of course, not nominal.

In 1936 =A3550 was worth as much as =A325,000 today.

Demographic shifts (divorce, migration into cities, fertility) will
create permanent changes in house prices, but these are just as likely
to be negative as positive. Speculation bubbles don't bring any net
gain either. Just because house prices have increased in the last 10
years does not mean they will continue to do so. Extrapolation is a
fallacy. The only way to predict growth is to look at the reasons of
house price inflation. House price growth cannot be sustainable,
because the amount of wealth contained in the housing stock is a
constant.

Re: House Buying Myths

But if you think that proves that they can only keep going up, you're
comitting the gambler's fallacy.

Re: House Buying Myths

Some houses built for less than £500 in 1935 are now worth £500,000. The
value of the house hasn't increased, the value of the money used to buy it
has fallen.


<> wrote in message
news:
I was talking about real house prices of course, not nominal.

In 1936 £550 was worth as much as £25,000 today.

Demographic shifts (divorce, migration into cities, fertility) will
create permanent changes in house prices, but these are just as likely
to be negative as positive. Speculation bubbles don't bring any net
gain either. Just because house prices have increased in the last 10
years does not mean they will continue to do so. Extrapolation is a
fallacy. The only way to predict growth is to look at the reasons of
house price inflation. House price growth cannot be sustainable,
because the amount of wealth contained in the housing stock is a
constant.

Re: House Buying Myths

"house prices have increased since the dawn of time"

Re: House Buying Myths

In message <>,
writes
>Why are people in Britain so obsessed with buying houses? I would like
>to expose some of the gravest fallacies behind our house-buying
>culture.
>
>
>1. Rent is dead money.
>
>2. House prices can only go up.
>
>
>3. A house is one of the safest investments there is.
>
>
>4. A house is more lucrative than the stock market.
>
>5. If you get your foot on the property ladder early, you'll be able to
>trade up.
>
>Again, the housing market is a zero-sum game.
>But as an investment a house is a lousy choice.
>

Oh Shit!!!

I'd better sell the yacht and cancel my plans to retire to the Med,
where I was hoping to be sitting on my fat backside collecting money.

You carry on doing whatever it is you are doing, and enjoy <g>


--
Richard Faulkner

Re: House Buying Myths

<> wrote in message
news:
> Why are people in Britain so obsessed with buying houses? I would like
> to expose some of the gravest fallacies behind our house-buying
> culture.
>
> Quite the opposite. The housing market is a zero sum game, the stock
> market isn't.
> Investing in a high tech company can lead to invention of new
> technologies, which create real new wealth. The total amount of wealth
> contained in the housing stock is a constant. A company can grow
> 1000-fold in 10 years. A house is still just a house after 10 years.
>
>

Read todays Investors Chronicle (26 May) Technical Innovation benefits
consumers not investors.

William Nordhaus (Yale Uni) calculated that "only a miniscule fraction (3%)
of social returns from technological advances in the period 1948-2001 were
captured by producers. Most of the benefits of technological change are
passed on to consumers rather than captured by producers."

This is put down to "creative destruction", which Joseph Scumpeter points
out destroys the markets for old products. And
new products themselves get quickly superseded.

The best performing FTSE sectors of the last 20 years are those selling
products people bought 100 years ago - Banking, Oil, Mining, Tobacco.

Regards


Andrew

Re: House Buying Myths

That's quite sobering news for an investor in shares. Of course,
competition is always squeezing the profits from new inventions. But
this still doesn't mean the property market is any superior. I guess
the best idea is to diversify.

Capitals gains in the property market (ignoring speculation bubbles)
are only possible if the rates of migration and divorce. etc. continue
their trend. That is far from guaranteed. Cities such as Berlin have
been shrinking in recent years, as a result of low birth rates and
emigration. If the same ever happens to London house prices will
reverse their long term trend.

Among the best perfoming sectors were also the pharma and aerospace
industries. And the fastest growing companies are still innovative
companies such as google.

Re: House Buying Myths

On 26 May 2006 06:03:35 -0700, wrote:

>aerospace industries

That reminds me of Warren Buffetts observation that the world airline
industry has not made a dime for investors in a century of manned
flight. <>

Daytona

Re: House Buying Myths

Aircraft manufacturers and airlines are very different businesses.

Re: House Buying Myths

> > <> wrote
> >> "house prices have increased since the dawn of time"
> >
> Sam Smith wrote:
> > Yes? And? I guarrantee that unless an asteroid hits the planet and
> > causes some massive catastrophy that house prices will always go
> > up on average over time far better than any saving account. Always.
>
"Jeremy Sanders" wrote
> But over what time scale? Look at Tokyo property prices:
>
> Decreasing prices for over 10 years. It's going to take a lot of increase
> to get back to what a saving account would have gained in that time.

Ermmm - Japanese savings a/c's wouldn't have "gained"
anything at all in that time, with 0% interest rates!

Re: House Buying Myths

Tim wrote:

> Ermmm - Japanese savings a/c's wouldn't have "gained"
> anything at all in that time, with 0% interest rates!

Point taken! :-)

It still shows that house price rises cannot be taken for granted over even
10 year periods. The Japanese economy may have been particularly fragile,
but as other people have pointed out here, there are some indicators that
the UK economy may have problems soon.

--
Jeremy Sanders

Re: House Buying Myths

Tim <> wrote:

>> But over what time scale? Look at Tokyo property prices:
>>
>> Decreasing prices for over 10 years. It's going to take a lot of increase
>> to get back to what a saving account would have gained in that time.

> Ermmm - Japanese savings a/c's wouldn't have "gained"
> anything at all in that time, with 0% interest rates!

Sure, but there's no law that says that they have to stash 'em in
Japanese banks. The carry trade is based on borrowing money at zilch in
Japan and investing it elsewhere.


FoFP

Re: House Buying Myths

In message <44nu1miigvec$.1rcemgl9s33p5$>, Steve Firth
<%steve%@malloc.co.uk> writes
>On Tue, 30 May 2006 12:34:50 +0100, Jeremy Sanders wrote:
>
>> Look at Tokyo property prices:
>
>Err yes, look at the ludicrous over valuation of the Japanese economy that
>preceded it. The Americans laughed when a former Japanese prime minister
>described the Japanese economy of the 1980s as being "as fragile as a
>butterfly's wing." The PM was right, at the first sign of a hiccup in the
>world economy, the Japanese economy crashed.

Even so, that 'crash' is relative, whats the GDP per head there vs here?

--
Timothy

Re: House Buying Myths

> "Jeremy Sanders" wrote
> >> But over what time scale? Look at Tokyo property prices:
> >>
> >> Decreasing prices for over 10 years. It's going to take a lot of
increase
> >> to get back to what a saving account would have gained in that time.
>
> "Tim" wrote:
> > Ermmm - Japanese savings a/c's wouldn't have "gained"
> > anything at all in that time, with 0% interest rates!
>
"M Holmes" wrote
> Sure, but there's no law that says that they
> have to stash 'em in Japanese banks...

Yes, but likewise there was nothing to stop
them investing in property outside Japan!!

You need to compare like with like...

Re: House Buying Myths

> wrote:
> In message <44nu1miigvec$.1rcemgl9s33p5$>, Steve Firth
> <%steve%@malloc.co.uk> writes
>>On Tue, 30 May 2006 12:34:50 +0100, Jeremy Sanders wrote:

>>> Look at Tokyo property prices:

>>Err yes, look at the ludicrous over valuation of the Japanese economy
>>that preceded it. The Americans laughed when a former Japanese prime
>>minister described the Japanese economy of the 1980s as being "as
>>fragile as a butterfly's wing." The PM was right, at the first sign of
>>a hiccup in the world economy, the Japanese economy crashed.

> Even so, that 'crash' is relative, whats the GDP per head there vs
> here?

The people who scoff at ridiculous Japanese overvaluations show scant
understanding that the current valuations here will be seen in a similar
light in the future.

There's a strong argument that things are in fact likely to go more
badly here when our credit bubble bursts. The Japanese, at their worst,
were still saving a substantial fraction of their own salaries. That's
really not the case in much of the west, and certainly not in the UK.

FoFP

Re: House Buying Myths

On Wed, 31 May 2006 13:09:40 +0100, wrote:

> In message <44nu1miigvec$.1rcemgl9s33p5$>, Steve Firth
> <%steve%@malloc.co.uk> writes
>>On Tue, 30 May 2006 12:34:50 +0100, Jeremy Sanders wrote:
>>
>>> Look at Tokyo property prices:
>>
>>Err yes, look at the ludicrous over valuation of the Japanese economy that
>>preceded it. The Americans laughed when a former Japanese prime minister
>>described the Japanese economy of the 1980s as being "as fragile as a
>>butterfly's wing." The PM was right, at the first sign of a hiccup in the
>>world economy, the Japanese economy crashed.
>
> Even so, that 'crash' is relative, whats the GDP per head there vs here?

Are you unable to do your own research?

GOP per capita:

Japan $30,700
UK $30,900

Re: House Buying Myths

"Jeremy Sanders" <jeremy+> wrote in message
news:e5hakq$gek$

> But over what time scale? Look at Tokyo property prices:
>
> Decreasing prices for over 10 years. It's going to take a lot of increase
> to
> get back to what a saving account would have gained in that time.
>

Eh? What has that to do with the UK property market? Look if you don't want
to invest in property then fine but I have constantly found they offer far
better returns than saving accounts over a 10 year period or more. Yes they
are at a peak right now but you have to look long term and what has Tokyo
got to do with anything?

---
Sam

Re: House Buying Myths

On Wed, 31 May 2006 09:58:15 +0100, Jeremy Sanders
<jeremy+> wrote:

>It still shows that house price rises cannot be taken for granted over even
>10 year periods.

Decade long declines have been a feature of the UK property market.

Longest real house price declines -

Peak Surpassed Years

1970 1983 13
1971 1985 14
1972 1987 15
1973 1985 12
1974 1985 11
1975 1982 7

1987 1997 10
1988 1999 11
1989 2000 11
1990 1999 9
1991 1998 7

Daytona

<>

Re: House Buying Myths

Sam Smith wrote:
> <> wrote in message
> news:
> > "house prices have increased since the dawn of time"
>
> Yes? And? I guarrantee that unless an asteroid hits the planet and causes
> some massive catastrophy that house prices will always go up on average over
> time far better than any saving account. Always.
>
> ---
> Sam

Your "guarantee" is based on nothing but faith. It's like saying:

"It's hasn't rained for the last 100 days. Therefore I guarantee that
it won't rain tomorrow"

Re: House Buying Myths

Jeremy Sanders wrote:

> But over what time scale? Look at Tokyo property prices:
>
> Decreasing prices for over 10 years. It's going to take a lot of increase
> to get back to what a saving account would have gained in that time.

Which, for a Yen account, is nothing.

Re: House Buying Myths

Stickems. wrote:

> Some houses built for less than £500 in 1935 are now worth £500,000. The
> value of the house hasn't increased, the value of the money used to buy it
> has fallen.

It might in some cases, if the surrounding location has improved. Of
course, this can also work in the opposite direction.