Abstract
The Housing Market in the U.K. has been the subject of much interest in recent years. Housing is unusual in that not only is it used for living, but for many people it forms part of their investments. This investigation looks at whether or not investing money into residential property would be financially beneficial to the investor. Only the U.K. market is investigated due to the fact that comparing more than one market within the extended essay word limit would not be viable. Similarly the focus is only on residential property rather than other property types.
In order to establish whether or not residential property is a good investment it is compared to several other types of investment: The FTSE 100, Gold and a high interest savings account. This enables an argument to be set out that uses real figures to compare property to other investments incorporating graphs to illustrate the data. These results are an illustration of past trends within different markets and suggest that the U.K. Housing Market would have been a good investment. However, it is recognised that timing is important so the figures are then rebased. As a consequence the conclusion is seen to be different.
Knowledge has been used to suggest how the housing market may act in the future and it is believed that the U.K. Housing Market looks as if it is set to slow down in growth over the next few years and that now is perhaps not a great time to invest money into residential property in the U.K.
Word Count: 258
Contents:
- Title Page
- Abstract
- Contents
- Is Residential Property In The U.K. A Good Investment?
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- Four graphs – UK house price index, FTSE 100, Gold/troy ounce; Base Rate.
- Graph - £50,000 invested in various different asset classes since 1984
- Analysis of research
- Graph – Four different asset classes with January 1994 as the base point
- Analysis of research
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- References and Bibliography
- Appendix
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Is Residential Property In The U.K. A Good Investment?
This is an investigation into whether or not investing capital into residential property in the U.K. is a good idea. Everyone will be able to give an example of an area where house prices have rocketed or even perhaps fallen; but what I will be concentrating on for the majority of my investigation is house prices in general – the average increase or decrease in the prices. In this way I am hoping to give a picture of the overall health of the housing market and justify my opinions about whether or not it would be a good idea to invest money into the U.K. Housing Market.
The first thing to establish is what it is that I am asking. My essay will focus on residential property i.e. non-commercial or industrial property. The reasoning behind my choice is that I want to know whether or not it is a sound idea to purchase a property with the view to earning money out of this acquisition in the future or whether it would be a better idea to use alternative means of investment. Another reason for my choice is just that I consider residential property to be of more interest to me. Looking at a nice house can be pleasing to the eye and residential property, i.e. houses come in so many different shapes and sizes; where as most commercial buildings are very bland and rather displeasing to look at.
What else is it that I am asking? I am asking if residential property is a “good investment”. What is it exactly that defines a “good investment”? Investment in this sense is not the economist’s definition of: “The production of items that are not for immediate consumption.”The definition of investment that I am using for the purpose of this investigation is the expenditure of wealth to enable advantageous economic yield. The key word here is advantageous – there is some difficulty defining advantageous because of it being a value judgement, however a good investment has to be an investment that will give you a higher rate of return on the capital that you used. What I mean by good return is that it will generate more money than you originally started off with – increasing by a significant margin. What this margin may be is something that I will be investigating in my studies. An example of a good investment would perhaps be: buying a property at £500,000 and then in 10 years time that same property being sold for £1,000,000; thus generating a 100% increase. Obviously this would be a good investment because there is a 100% yield; but 100% over 10 years calculates to approximately 7% compounded per annum. On the face of it this investment seems very good but after a little examination it becomes clear that it is in fact deceiving. The reason why this investment may seem deceiving is that a 100% yield sounds as if it would be very profitable but in fact when one looks at it from another perspective then one can see that it is not as profitable as it seems – earning a more moderate 7% per year. Hopefully though, this example serves the purpose of demonstrating a reasonable investment. Something I will try to establish in my investigation is when do we draw the line and stop calling an investment good.
In this world one can invest money into a huge variety of different asset classes. Anything that you buy has the potential to be an investment, there are however a few more well known investments – for example one could put money into a bank account and receive interest payments on your money. There is a wide range of different bank/savings accounts all offering various interest rates. There are other ways to make your money work for you, for example: Shares, Precious metals, Banks and Housing to name a few.
Investing in property can be implemented in a multitude of different ways – for example one can buy a house with the view to letting it out, this way earning money from the rental income stream. Or one could buy a house with the view to living in it and then sell it in the future, thus making money on the increased value of the property. One could also buy a house and renovate it adding value in this way. There are also more complicated ways of generating income from property such as buying the contract of a house which has not yet been built and then selling the contract on for more money enticing the contract buyer with facts and figures that the property’s value will rise over the next few years.
For the purpose of my investigation I shall only be concentrating on the market of owner-occupied housing. The reason behind this is that about 70% of housing in Britain is currently owner occupied – “There are about 24.7 million dwellings in Britain, 17.1 million owner-occupied, and about 150,000 new houses are built each year”. Elasticity of Supply is determined by “The responsiveness of supply to changes in price”. Even if the price of housing suddenly shot up it does not mean that the supply of housing would suddenly increase like the price. Of course there would be more supply of housing but as the figures above will show the supply can not match soaring prices. The main reason being that houses can not be built very quickly; this is a long process. Planning permission must be granted then plans have to be drawn up and the building process itself can take a very long time and is often prone to setbacks, so there are influential factors that will determine the elasticity of Housing Supply. Thus we can say that housing supply is very inelastic. (See Figure 1)
When buying a house one obviously wants to buy for as lower cost as possible and sell for as higher price as possible. So what is it that determines the price of housing? The main influence on price is therefore demand. Demand could rise for a number of demographic and social factors, but a big player is population rise; with this comes an increase in demand for housing thus generating an increase in the prices for housing. Some of the demographic and social factors could be the age structure of the population – as the population ages there is a bigger proportion of the population living in separate housing. Divorce is an example of a social factor and there is a speculation element as well – expectations of future house prices, this is key to property investment. One would not buy a house if the expectation is that the price will fall, so when investing in property one must take this crucial factor into account. One must also take into account the state of the economy, such as these short term factors: growth of disposable income, the rates of employment and unemployment and the interest rate. This is all very important because as people become richer, more will wish to buy houses thus increasing the demand and therefore rising prices.
There are many who say that the best thing to invest your money in is in bricks and mortar; however some see a bubble in the housing market which is close to bursting. It is therefore worth looking at what has happened to the housing market in recent years. The market boomed in the late 1980s. (See Figure 2) but then came the recession of in the early 1990s. This recession came about for number of reasons. It can be accounted for by rapidly rising interest rates between 1988 and1989. Rates more than doubled from 7% to 15%. This affected people’s ability to service their mortgages and along with this, house prices had been rising in the years preceding the recession. A large number of U.K. households encountered the problem of falling house prices and negative equity; as a result the value of their properties fell below the size of their outstanding mortgages. This led to many houses in the early 1990s being repossessed “400,000” by the lenders due to the fact that the mortgages for the borrowers were now out of their financial grasp. Thus affording a house at this time was difficult – this would hinder the chances of a good investment in the housing market. But there was light at the end of the tunnel; since 1996 house prices have started to rise and the rate of house price inflation reached an annual rate of approximately 20%. Again the housing market was reflecting the state of the economy. Unemployment rates were falling in the late 1990s through to the new decade alongside with relatively low interest rates. The housing market was looking like an attractive alternative source of investment from the stock market – which at this time had been falling.
