In the book ‘Rich Dad, POOR DAD’ by Robert Kiyosaki, he writes the unnerving statement: ‘Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets.’
What’s this got to do with the UK housing market? Thinking about it, how often have you heard people talk about their house purchase, their home, as an asset?
If you are British, from a young age your elders extol the virtues of being a property owner, telling you that owning your own home is an important milestone and a life-long asset to you. But is this really the case?
The first thing to say is, if you pre-date millennials, it’s likely that you’ve had access to what was once a fairly priced, largely domestic market that for the most part has been a reassuringly stable and prosperous property market (although, that somewhat ‘given’ of permanently rising residential prices is, at least in the near term, vulnerable to an unpalatable, or worse, acrimonious EU exit). Secondly, given the strength of the property market, the loan to values – mortgages have had to increase, along with the deposits, to keep pace with values.
In other words, in order to become a first-time buyer today, you need to take on huge amounts of debt to be able to afford what is, for Generation Rent, an increasingly illusive ‘asset’.
Comparing this ‘asset’ with, for example, a typical 9 to 5 job, unlike a salary that pays a monthly cash sum (a ‘current’ asset of measurable value), it actual costs money every month to retain ownership. In the early years it’s typical to pay more in interest than paying down the outstanding mortgage. Where pricing is today, any severe recession or shock to the market, and homeowners could run the risk of being in negative equity. Worse still, there is no guaranteed respite should the economy grow rather than slow. Those on variable rates are exposed to interest rate rises that filter through to the monthly payments. Taking this perspective, what has always been spoken of so fondly as an asset arguably should be considered a liability.
With the cost of renting so high the difference between a monthly mortgage and paying rent, especially in London, is not huge. So, while owning your own home comes with extra risks and responsibility, there is incentive to do so with the hope to benefit from capital appreciation while owning a few extra bricks each month.
If only it was that simple. For most people, getting a deposit together is a battle in itself.
Then there’s stamp duty that needs to be factored in too, all of which is hopeless if the multiple on your salary is too low.
Perhaps it’s time to rethink where our money goes each month? For sure, putting all your savings directly into the stock market is not the place to go. Yes, the possible return on your investment may be higher, but the associated risks for doing so may mean a more balanced portfolio would be better – advice here from a professional is probably the right course of action. However, if you still feel like dipping your toe in the property market perhaps take a look at an emerging industry that offer customers the chance to win a property for just £5. If you get the question right you are then entered into the competition and have the chance to win a home with no mortgage, no stamp duty and no strings attached. Now that’s what you’d call an asset.