Safe as houses?
The dangers of relying on your home as a nest egg

15/03/2019

It’s not hard to see why investing in the UK property market might seem so attractive.

Over the past two decades, average house prices have almost quadrupled. This capital growth has made UK homes an enormous store of wealth, with an estimated total value of £7.3 trillion, as of January 2019.

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Given their relatively high cost, homes are often households’ most valuable asset. Understandably, property ‘nest eggs’ are central to most people’s long-term financial plans – in many cases more so than pensions and other savings or investments.

However, over-relying on any single asset, even a property, to pay for your future carries risks. Bricks and mortar might have delivered stellar capital growth recently, but house prices can go down as well as up.

How much can house prices rise?

Predicting where house prices are headed might be a fool’s errand, but optimists are buoyed by a structural undersupply that could continue to fuel price growth. Even if housebuilding ramps up, however, there remains the important question of affordability.

By comparing average salaries to average house prices, property is less affordable in England and Wales than at any point on record.

Rising house prices have been made possible, in part, by cheap borrowing. If and when the Bank of England decides to raise interest rates from their historically low levels, banks and building societies will have to raise mortgage rates in turn.

For prospective homebuyers and homeowners re-mortgaging, higher interest rates would mean larger monthly mortgage repayments. Bearing in mind mortgage lending rules that restrict the size of home loans according to affordability, higher interest rates could put downward pressure on house prices.

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As illustrated in Figure 1, property prices have not consistently risen year after year. During the financial crisis, average house prices fell 19% from their 2007 peak, and only surpassed their pre-crisis levels in 2014. In the north of England and Scotland, house prices had not quite fully recovered by early 2019. In Northern Ireland, house prices remained roughly one-third below their 2007 peak.

The recent financial crisis was not a one-off. After peaking in 1989, average UK house prices fell by 20% over the following four years and only passed their previous high in 1998.

House price volatility matters especially if your financial plans, or even retirement, hinge on the assumption that house prices will continue to rise above the cost of living. If you’re relying on selling up and your home’s value suddenly falls – or if you can’t find a buyer – you may find yourself working longer or downsizing your plans.

Diversifying could be the right move

By diversifying, you can avoid any over-reliance on the future value of your property, which, like any other asset, is only worth what someone will pay for it at that moment in time. Different assets will perform differently in different circumstances, so investing across assets and regions can reduce the risk of losses.

Property is not alone in offering a historic record of long-term capital growth. Other assets, not least company shares, have the potential to rise significantly in value over time.

While share prices can fluctuate sharply over the short term, as investors react to company-specific or economic news that changes the outlook for that company, over the long term, share prices will be shaped by a company’s profitability. Individual shares (unlike property, generally speaking) can lose all of their value if a company fails, making it wise for investors in company shares to invest broadly. One way to do this is by investing through funds.

By investing in a fund that pools your money with other investors’, you can gain access to a wider range of investments. Professionally managed ‘active’ funds will aim to achieve a specific objective that could resonate closely with your personal investment goals. A fund could, for instance, aim to deliver a steady income stream from bond markets with an approach to risk and return that aligns with yours.

Setting aside the investment case for the UK house market – and the possible impact of rising interest rates – putting all of your money into one asset, even property, may not be the best way to maximise long-term returns while keeping a lid on risk.

Important information

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of an investment, please speak to a financial adviser.

When you're deciding how to invest, it's important to remember that the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is also no guarantee that a fund’s objective will be achieved.