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property prices and growth

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The couple opposite me had their house for sale for ages. Months and months and months. It finally sold in March to an investment buyer, and it’s currently rented out.

Interestingly, it’s quite easy to find out the prices that houses have been selling for in an area if you use the website houseprices.co.uk. The information dates back to about 2000, and the house opposite me has sold three times in that period

  1. March 2008 - £102,000
  2. July 2004 - £91,000
  3. March 2000 - £24,000

So the nice couple with the baby made £11k on their house in 4 years, which works out as an annualised rate of return of 3.15% per year. Which is about the same, or slightly more than, the rate of inflation in the same period. Interestingly, the people before them made an absolute killing. They made a £67,000 profit on the house, which works out to an annualised rate of return of 36.19%.

House prices in the UK have increased on average at 2% above the rate of inflation since the 1970s. But this is very much not the rate of return each year in that period. In the case of the houses on my street, they seem to have had their biggest rates of return in 2000 to 2003. And not done very much at all in the last section of the boom. I think it goes to show that if you’re using them as an investment, houses need to be kept for a long period of time for any capital gains to be realised.

This is why if you buy a house it should be because you plan to stay their for 5 or more years. Given what I saw of the property details of the house opposite me, it’s slightly nicer than my own, and I think that my house is worth around 10% less than that house, and more importantly about 5% less than the amount that I paid for it.

I’m not the only person who is not doing well out of their primary residence at the moment. Cleverdude thinks that his house in metro DC is now probably back down in value to the price that he paid for it, which puts paid to any plans that he might have had to move. I’m contemplating changing jobs in a few months time, and I’m going to be limited to the city that I currently live in. For various reasons this is a good choice for me anyway, which is lucky because having to sell up now would be a bit of a disaster.

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10 comments for “property prices and growth”

  1. That would be about comparable to the rate you’d be earning (if that’s the word for it) on a real estate investment in the U.S. Real estate is not a short-term investment.

    Also, it strikes me that if you’re “investing” in a house you’re living in, whatever value it accrues is strictly on paper. That is because every other house around you is accruing in “value” (all these terms should be taken with a grain of salt) at the same rate. So, say you buy a house for $100,000.

    Five years later, at 3.5%, your house is worth $118,768. You can’t take the $19,000 increase and move to a nicer neighborhood, because all the nicer homes have gone up in price commensurately: A house that was worth $119,000 when you bought yours now will cost you $141,334. Unless you’ve wangled a huge raise or you’re a Master Saver and have accrued enough for a huge down payment, you can’t afford that any more than you could have afforded $119,000 five years ago.

    In other words, relative to what houses cost, your investment has not really increased in value. The only way you can collect is to move to a smaller house or into a lesser neighborhood.

    The only ways you can make money in real estate, IHMO, are to buy to buy rental property or to purchase your own dwelling, which cannot be a fixer-upper, well below market value. Or to sell at the top of a flukish run-up in prices and then not buy another place until values drop back to normal.

    As a homeowner, your best bet is to plan to stay in a house at least ten years, during which you build a savings fund to use as a down payment on the next mansion. In my neighborhood (and probably in yours), over the long run the increase in value has been about 6% to 8%. In time, you’ll probably come out rightside up in your investment.

    Posted by Funny about Money | August 11, 2008, 1:51 pm
  2. @ Funny about Money - very sensible and much food for thought.

    I live in DC - I bought in spring 2004, still on the upswing, but before the peak. What kills me is closing costs - so expensive in DC that it’s not worth selling unless I can sell for 50K more than what I bought it for. Which is possible in this market, but not likely.
    But speculation has people moving out of their McMansions in the ‘burbs and back into the city if gas jumps $5/gal and DC imposes tolls. Not that I’m holding my breath, but parking is already going to get a lot tighter around here.
    I think in 3-4 years, I’ll be able to sell my place and make enough profit to put 20% down on my next place. Until then, I just need renters. :)

    Posted by deepali | August 11, 2008, 3:00 pm
  3. Actually, to make money you could also buy somewhere that’s up and coming and will increase in value more than the surrounding area. If my house increases by 20%, but other areas only increase by 10%, effectively narrowing the gap then I can make money. These tend to be in less nice areas, at least when you buy.

    Conversely in a falling market, you want somewhere that doesn’t drop as much - this really means a buy in the already lovely areas. So, it comes down to timing the market, which is probably easier in your really local property market but easier, and easy are not one and the same thing.

    Posted by plonkee | August 11, 2008, 3:08 pm
  4. Good post and cetainly something for all of us considering the property ladder or on it to think about. I think people kept thinking they would “make a killing” based on what happened post 2000 but actually it really only made sense that things would have to slow down/taper off. I read recently that the average house is selling for 89-90% of it’s revised (i.e.not hte original) asking price but taking a lot longer.

    I doubt I’ll be on the property ladder anytime in the next 3 years and keep thinking about your post re moving actually….!

    Posted by Frugal Trenches | August 11, 2008, 7:13 pm
  5. Residential real estate in the U.S. has a real return of about 1%.

    At best, consider your home an inflation hedge, but don’t expect it to serve as an investment.

    Maintenance costs on a home run about 1% annually, and transaction costs (when you sell) can approach 10%.

    The very large house where I grew up just sold for $1.1 million (our family sold it in 1987 for $600,000)

    That’s a very poor investment when you subtract out inflation, but the sheer number of dollars involved tends to blind people to the real rate of return.

    Posted by Bill | August 11, 2008, 9:34 pm
  6. Real estate investing requires proper planning and capability of forecasting. But sometimes plans fail unexpectedly. So real estate investment should be dealt carefully.

    Posted by Financial Planners at Respond | August 12, 2008, 1:02 pm
  7. What Deepali says about the central city is exactly what’s happening here in Phoenix. The outlying regions, mostly brand-new suburbs, are really suffering. But values are staying fairly stable and even increasing in the central area. In my neighborhood, a house comparable to mine just sold for $370,000…I paid $232,000 for mine five years ago.

    The frightening Investment House that my son and I went in on two years ago is in a centrally located tract of virtually identical 50-year-old brick houses. A place on his block sold for $35,000 more than we paid for his, more than the total amount we have in the house after fix-up. Right now if we unloaded the place FSBO, we’d come out even, which is probably acceptable after only a couple of years.

    Real estate, like any investment, represents a risk, especially given the absurdly high transaction costs, as Bill points out. Most of the time it’s a risk in slow motion…in normal times the market changes so slowly you’re barely aware of the changes. Your view of the costs of the investment, too, is altered by the fact that this particular investment also functions as a roof over your head…generally a better roof than you can rent.

    Posted by Funny about Money | August 12, 2008, 1:22 pm
  8. Investing in homes is not something that I know anything about. However, the reason I haven’t bought one yet is because I haven’t really settled into one place yet. I think that I will continue to rent until I’m sure that I am going to stay in said house for several years.

    Posted by Maggie | August 12, 2008, 6:30 pm
  9. nice

    Posted by Jessica Thomson | November 20, 2008, 4:47 am
  10. cool

    Posted by Jessica Thomson | November 20, 2008, 4:48 am

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