Also you really can screw yourself up with bricks and mortar as we have recently seen with tens of millions of people getting themselves into negative equity. Not a good position to be in at all! There are a plethora of different ways that you can dip your toes into the property market with methods like Buy To Let, Rent to Rent, Lease Options and just a plain old deposit to buy. This is just a small list. However I need to be clear that this article is only aimed at the uninformed. The reason being is that I know of many property investors who can and will make money in the property market regardless of what’s happening to prices or interest rates. This is because they are informed & sophisticated investors! The key word there is ‘informed’. You see most people probably spend more time researching and deciding which car to buy next than what stock or house they’re going to buy. Whereas a lot of people who are currently in the Buy to Let market are only in there because of the ‘feeling’ that property prices ‘always goes up’! So they buy any old house to then let out. Now my good friend Graham Rowan (The Renegade Investor) has made 2 great YouTube videos called ‘Buy to Let is for mugs’ and ‘Buy to Let is STILL for mugs’ and I couldn’t agree with him more. We have both agreed on this subject for years now and those that are doing Buy to Let right now, are going to severely get burned. Especially as UK house prices are the highest they have EVER been. No matter what indicator you use from House Price to earnings ratio to House Price to Gold…property is just far overvalued at the moment due to low rates, increased currency supply and the Governments continued propaganda of everyone must own their own home (95% mortgages).
“But my house is worth a LOT more than when I bought it years ago. So I’m not THAT worse off”
This is another fallacy that needs to be addressed and there are a couple of points one really needs to understand. The first one is that you need to look at relative wealth. If let’s say you bought a house in 1974 for £10 000 and right now in 2014 it’s now £500 000. You would naturally think that you are now 50 times wealthier. But are you? If you were to sell your house and buy another similar spec house in the area, you would only be able to buy 1 house as the price for all the other houses in the area would have risen in price like yours. But if you were to buy a similar spec house somewhere rural let’s say for £250 000, only then has your wealth doubled. Which is a lot less than being the originally perceived 50 times wealthier. Plus doubling your ‘wealth’ over a 40 year period is actually disastrously bad as real living costs have increased by a factor of 50 (at least) in that time frame.
The other point to consider is how you are measuring your ‘wealth’. In the previous example, your house is now worth £500 000 and that’s quite impressive for most people. But price and value are very different things. Yes your house has gone up in price, but that’s mainly due to the currency supply being in exponential growth. But your house has actually crashed in value. If you were to value your house compared to bushels of wheat, it’s crashed in value, barrels of oil, it’s crashed in value or precious metals, it’s crashed in value. If you were to value your house compared to anything other than the Pound or Dollar, you’ll see that you’ve actually lost wealth. So you need to stop valuing things in £s as it’s constantly devaluing. That’s why I value things in ounces of Gold or Silver as their value has remained constant for 5000 years. A 1 ounce Gold coin would buy you a tailor made Toga or suit of armour in the Roman times and right now a 1 ounce Gold coin will buy you a tailor made Armani suit.
Also another way of seeing how much your house has devalued is to compare it to the US Dollar. In 2007 your £500k house would have been worth about $1 million. However since then, the Pound has been one of the worst performing currencies in the developed world and so now in 2014, your £500k house is now only worth $815k. That’s a $185k loss…or 18.5%! You may be thinking that the Dollar is irrelevant because you pay for everything in Pounds, but it is very pertinent. Pretty much everything you buy is originally priced in Dollars as the Dollar is currently the world’s reserve currency and predominant unit of exchange, so when the Pound Sterling weakens…things suddenly become more expensive for you. Just look at petrol prices and you’ll see my point.
But long story short…regardless of who you are or how clever you are, you need to stop being a ‘Saver’ and become an ‘Investor’…