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We live in a rather odd world full of assumptions concerning all sorts of things one of them being that to “Own one’s own house, is a very good thing” but is it ? And if it is a “good thing”, who is it such a “good thing” for ?

My thoughts about the property that most people own were in no small part started by thinking about old age and people having to sell up in order to move into a nursing home and the fact that many will outlive their capital.

Is Your View of Wealth Valid ?

What is wealth, what is your wealth and is your view of ‘your wealth’ even realistic ?

Karl Marx described religion as the “Opiate of the People” by which he meant, that as long as peasants and workers believed in “God”, they would accept unimaginable hardships and sufferings in this life because of the promise of a better one after death.

In this context, for the majority of British people, is “owning your home” the modern “opiate of the people” ? Put it a slightly different way, with probably two thirds of the population having a mortgage on their home is it perhaps an “illusion of personal wealth” rather than the real thing ? Yes it gives you access to capital if you sell it and it follows that if you need to relocate for whatever reason, having capital is useful but, is it real wealth ?

If as so many have done in recent years, you re mortgage to raise capital, you have depleted your wealth so how will you recover it ? If you rely on house price inflation to erode the value of your debt, you will be no better off because everybody benefits from that, you still will not have replaced your “lost capital”.

Housing is Not Real Wealth

I would agree that if someone is seriously rich and owns a number of properties, the loss of any one of which would not make them “poor”, housing can represent a part of “real wealth” but, I am not writing this in the context of people who are obviously genuinely wealthy, my perspective is far more “ordinary”.

I am more interested in people who own one home and the value of that property represents the vast majority of their personal assets. If they lost that through whatever misfortune, they would be financially and probably emotionally devastated. It would make no difference if they owned 80% of the equity in the property nor what the “price band” of it was, the loss would be total so is it any real measure of wealth ?

House Price Inflation or Deflation

The value of anything is the price someone is prepared to pay for it, whatever “it” is. Ignoring somewhere like Bishops Avenue in Hampstead, in housing, any street or any house in a particular location will command a particular price level. There can be variations because of condition and position (end of terrace rather than middle of…), but even these considerations in percentage terms, will not vary the price by that much. If the median for the area is say £300,000 then bad condition to top condition will probably only be 10% although the good one will sell quicker.

In order to generate real wealth from property you need to do something spectacular. I have a friend who bought a property in a very poor state of repair but it did have potential, it cost him and his wife £200,000 plus about 3 years very hard work. They did use builders for the important structural work which meant raising a further £55k but otherwise, all the painting, decorating and building a garden, they did between them.

The bottom line was that the £200,000, 2 bedroom wreck that they worked so hard on became a well appointed 4 bedroom house with two bathrooms that they sold for £720,000 which was way beyond house price inflation in the area over that time. However, a point to be made here, the location near Richmond was such that it was possible to “lift” the price of an individual property in this way, attempt the same thing with a terraced house in Dagenham and you are likely to come unstuck.

A further point to be made is that even in this case, a little further down the line, this couple divorced so whilst the gain was not “lost”, clearly it became dissipated as is always the way with divorces.

Wealth Creation

The above tale is one of wealth creation through housing but it is rare, for most people although if you bought a house in the 70′s for £70k and today the property is valued at £500k, you will feel rather wealthy but it is unlikely to be true in absolute terms because house price inflation is like the tide. If your house was a boat moored at a marina, when the tide rises, the boat rises with it, when it falls, the boat also falls with it.

I can remember talking to a chap who had a house in Maidenhead and declared that his “House was his pension…” According to him, when he reached retirement age he would sell up and buy a smaller, cheaper house using the surplus cash to live off.

This was the 1980s and I told him then that he was fooling himself because whilst I agreed he probably would sell his 4 bed house, unless he was prepared to move to Walthamstow or down the road to Slough, he wouldn’t see any benefit. The reality is that he would trade down to a bungalow in the same area and its price would only be slightly less than what he got for his house.

If people genuinely want to be wealthy, they need to start their own business because unless property is your business, very few people will ever become seriously and sustainably wealthy by just relying on the value of their home.

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