Is Property Investment Really As Safe As Houses?

I just watched a fascinating series on ABC TV based on the book “The Ascent of Money: A Financial History of the World” by Professor Niall Ferguson.

Episode 5 of the “Ascent of Money” series focuses on the housing/property market and explains why the idea of your family home as a pension/insurance policy is really flawed – a bet on bricks and mortar is anything but “as safe as houses”.

In the English speaking world world we tend to think of property as a one way bet – the simplest way of getting rich is to play the property market. In fact you’d be a mug to invest your money in anything else

But the remarkable thing about this supposed truth is how often reality gives it the lie because like stock markets, property can soar in value only to crash in the most spectacular way.

In Britain from 1989 to 1995 the average house price fell by 18% .. but that’s nothing compared to Japan where property prices rose by 300% between 1985 and 1990.

Many Japanese rushed to catch this surging wave to lead them to a guaranteed fortune … but it wasn’t a wave, it was a bubble because property prices then fell 75% wiping out all the previous gains.

As an example Ferguson visited an apartment for sale in a up market area of Tokyo currently valued at US$1 million. In 1990 before the crash in prices it would have sold for US$3 million. 19 years later it’s still only worth 1/3rd of that value.

As assets go, houses are pretty illiquid, you can’t sell them in a hurry if you get in a financial jam. So no, property isn’t a uniquely safe investment. House prices can go down as well as up.

The real flaw in the idea of a property owning democracy, as the recent “sub prime mortgage” disaster has proved, is that the housing market, like any market, is prone to booms and busts.

So anyone who thinks that property prices will inexorably continue to rise forever … is setting themselves up for a huge disappointment.

You can watch episode 5 below, buy the Ascent of Money DVD set from Chaos.com or the book The Ascent of Money: A Financial History of the World by Professor Niall Ferguson from Amazon.com

8 thoughts on “Is Property Investment Really As Safe As Houses?”

  1. I saw that on the other night and was pretty interested in watching it but was out voted. It appears it was as interesting as I thought and I will definately watch the series. Thanks for the reminder.

    Larry

  2. This series was really informative, I’d recommend watching all of them to expand your knowledge about the monetary system in general as well as the housing as an investment episode directly. I think more people in general need to work on their financial literacy and this series will help you with that.

  3. The real investment lesson here is diversification. Growth assets (property falls into this category) have the potential for capital growth. Over the long term, they have shown to do just that as a whole asset class. Individually though, direct property, just like owning one stock can be very dangerous business.

    The second lesson of course is that one shouldn’t try to squeeze a higher return out of one’s defensive asset class! Defensive assets are there to lower volatility, not create more.

    It’s just a matter of educating oneself and understanding the risks worth taking.

    This was a great show.

  4. Very interesting article. Everyone always plays off real estate as the surest thing. I’m going to have to look into these tv episodes. How did I miss it?!

  5. Anyone who thought that property investment was a sure thing never watched the prices fall they way they have on the Tenerife property market over the last 18 months. This is a small island, driven by tourist money. At times when money is tight in UK and the rest of Europe, people stay home instead of going on holiday overseas. It didn’t take long for the knock on effect to bring house prices down and according to some they may still have some way to fall.

    Great for investors who have the readies. Not so good if you are stuck in a mortgage with negative equity.

  6. Very interesting show- there are so many interesting issues in investment, growth assets, property valuation, etc. I think it is important to try to understand as much as you can so that you understand all the risks. Thanks for sharing!

  7. It´s inevitable that some people are going to get caught out. Once the property market hits its peak, everyone who has bought in the last 2 years or so is pretty much locked in for the long haul.
    I know a hell of a lot of people who bought multiple properties when times were good. mortgages against every one of them, hopeing they would simply rent them out for 25 years and bingo!
    The problem for these people is they have pretty much got zero cash now, their portfolios are in negative equity and in between tenants they are screwed trying to keep up with their mortgage payments.

    Buying at or near the bottom of the market is obviously the thing to do. I am looking now for myself but still not convinced that residential property prices in my area are anywhere near the bottom yet so may well give it another year and see where the market goes.

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