Building Britain Series - 2022 onwards


Property Market
In this article, we want to talk a bit more about housing as an asset.

What are its specific strengths and weaknesses, and how should investors gain exposure to it?

The answers to these questions have huge significance, not only for our approach to our personal finances, but for how we approach our careers and our lives more broadly, too.

The traditional view

Many of us were brought up on what can be termed the traditional view of property.  This view starts from the assumption that house prices have almost always tended to go up over time, and therefore it is financially prudent to buy a house as early as possible and to live in it whilst it increases in value.

Then, when you are ready to sell, you can realise a substantial capital gain and reinvest some or all of this into your next property purchase.

In this way, the concept of the property ladder is familiar to us all, as is the idea of incrementally climbing higher on this ladder throughout your career.

Under this view, homes are considered as an asset, in the sense that they tend to rise in value, and as a store of wealth, in the sense that a large portion of our disposable income is spent paying down the mortgage that financed the initial house purchase.

The traditional view has always found ample evidence in the data on UK property prices.  As the chart below sourced from Statista shows, even over the last decade alone, UK average property prices have performed extremely well.

However, there are compelling reasons why houses – or more specifically, your personal home – should not be considered as an asset.

Is a house an asset or a liability?

An asset is something that an individual or corporation owns and derives some economic benefit from.  This could be simply that it is expected to increase in value over time, but more commonly it is that the asset yields income to its owner.

Classic examples of assets that might combine these two properties together in varying ways would therefore be stocks, bonds, and cash in the bank.

A liability is the opposite of an asset in the accounting sense.  Liabilities are things that individuals or companies owe, and therefore liabilities create a drag on income.  Repaying an outstanding loan or a mortgage would be examples of liabilities.

With these definitions in mind, then, it should be quite clear that most of the time a house is not an asset.

This is because the house and the mortgage attached to it represent expenses that need to be managed, and unless you sell your house you can’t realise any gains in value.  It’s also worth mentioning that even when you do sell your house at an increased price from what you bought it at, the next house you buy will more likely than not also have seen an increase in its price over the same time period as well.

Finally, it needs to be considered that the interest paid on your mortgage over its duration is another factor cutting down to size the capital gains you could potentially realise on the sale of your house.

Real estate is an asset, your home is not

The arguments above all seem to convincingly point to the fact that houses, especially in the sense of the primary residence where someone lives, are not and should not be considered as an asset.

However, real estate which you aren’t using as a residence is a whole different matter.

Properties can make fantastic assets once separated out from the issue of where you need to live because they can then be used to generate steady and inflation-proof cash flow for their owners in the form of rent payments.

Obviously, this can only be effective for a property where you aren’t yourself living, and likewise the chance to take advantage of property values rising by selling can really only be put into practice if you don’t rely on the property for your own home.

Furthermore, an asset implies an investment, and investments, as we all know, should include diversification.  This cannot happen if all your money is tied up into one property. 

In fact for numerous reasons we have explored further in other articles, true real estate investment provides a unique set of advantages to its owner by simultaneously providing diversification, reliable cash flow, capital appreciation, and acting as an effective hedge against inflation.

Building Britain in 2022

Homes have been thought of as a store of wealth and as an investment in the UK for generations.  However, there are many, many problems with this point of view, and for plenty of people home-ownership might just not be the right path for them in the current age.  As a simple example, it is very costly to move homes every time your circumstances change – from single life, to married life, to having children to retiring – your needs are different at each stage.  Agency fees, stamp duty and moving costs all eat into your potential gain. 

Real estate itself, however, can be a phenomenal investment.

For the ordinary investor who wants to get some exposure to the strengths of real estate as an asset class, their capital should be going into the companies that build, professionally own, and manage these physical assets.

Gaining access to real estate investment possibilities has never been easier or more cost-effective than it is today, partly due to the impact of new technology, and partly due to the increased competition in this space.

Shojin is at the forefront of harnessing the benefits of technology to compete with incumbent real estate investment firms who carry on serving the same large institutional clients without bringing any investment products to the individual investor.

Building Britain in 2022 means providing more homes suited to today’s lifestyles; it also means providing better investment opportunities for ordinary investors long locked out of the lucrative real estate investment sector.

Making positive change happen here also needs a revolution in how we think about housing and real estate more generally along the lines suggested above.  Luckily, however, that revolution has already begun.