WHY SPECULATE WHEN YOU CAN ACCUMULATE?

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17th September 2016

Why does the price of property always increase? Medium to long term this is certainly the case.   Speculators may comment the bubble will soon burst, but experience shows all that happens in a downturn is prices deflate marginally for a finite period of time, and then they carry on their march upwards.

It is simple, money is infinite, it can be printed at will, and property is finite and fixed.  Therefore, as you print more of it, the less value it will have and the more the price of fixed assets will increase.

Many people are saying property is overvalued, however, I have been hearing this over the last decade.  How do you establish whether something is overvalued?

It would be interesting to contrast property against a real measure of wealth, gold being the obvious choice.

According to the House Price Index, as of July 2016 the average house price in the UK is £216,750.  The current price of an ounce of gold is £1,001.  This means you will need 216 ounces of gold to purchase a property in the UK.

The ratio reached its most extreme in favour of property in 2004, then the average UK house cost 720 ounces of gold.

This means in gold terms property has fallen by almost 70% since 2004.  Yet in cash term it’s risen by 43%.

In 1980, the average UK house could be swapped for less than 70 ounces of gold.  In the last three years, UK houses have risen by about 60% in value against gold.

The attempt of trying to value such an asset against property is rather confusing, and therefore is not a means to govern the real value of property.  This is probably to do with the complex factors which affect the demand and supply of a precious metal.

However, there are two advantages property has over gold, one is it produces a monthly income, and the other is it can be geared reasonably easily.

The bottom line is no one can really ascertain whether property is overvalued.  The current market looks shaky for sure, some segments and locations more so than others.

The shrewd investor buys in this environment; the current market comes as a god send for buyers.

The best course of action for those with limited funds is to purchase with the focus of yield in mind.  Therefore, whether the property price rises or falls, it has no bearing on month to month yield.

There are means and ways to achieve high rentals.  Currently we are closing a deal in W1 where we expect the rental yield to be 8% per annum.  We are also looking to enhance the rental in a Kingsbury home from £1,700pm to £2,550pm net.  Call the office now to find out how we can make this happen for you.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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