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Chris Gilchrist: Our love affair with property should end

How long does it take for financial habits to change? We are about to find out.

Until the crash of 2008, the view that buying a home was a good financial decision was firmly lodged in the wallets of all Britons. It was only briefly dented by previous crashes because even with stationary house prices in the mid 1970s, high inflation meant that a big mortgage made you packets of money because your earnings rose in line with inflation. And even if you bought at the top in 1988, you still ended up ahead less than a decade later.

But all this depended on dodgy accounting. House price indices are phoney because they take no account of maintenance costs, and when buyers are choosy you have to spend a lot to get your house in good enough nick to sell. The endowment effect, familiarity, confirmation and mental accounting are all too obvious in the positive view of property by committed owners.

Today, people increasingly do the maths. Is it cheaper to rent than buy? To the cost of mortgage interest, add maintenance and buildings insurance costs in order to compare with rents. And in my view, add a risk premium. Only if the sums show a big gap in favour of buying does it make sense for people in work to buy. That qualification is because of the other cost people do not account for, stamp duty and the other costs of a move – often 3 to 4 per cent of the price and equivalent to about six months’ rent.

I think we are on the way to a more continental approach to housing, in which people rent while they work in cities and buy when they retire or move to the countryside. As yet, we have not got the right type of city centre housing with communal facilities (laundry, heating, waste disposal) that smart continentals have.

Lots of those 2004-06 flat blocks just do not cut it in terms of efficiency and ambience.

What we really need is to allow people to build their own homes more easily. French and Italian villages have plenty of new houses but because they are individually built in the same style as existing homes, they look fine. What we all hate is identikit neo-Georgian legolikes dumped in random fashion on existing villages.

I like the Irish countryside, dotted as it is with white bungalows in small plots, much better than the chocolate-box pretence of England, where “protection of the countryside” justifies the continuing concentration of land ownership by a tiny minority of the population and denies millions of people the chance to live outside cities while ensuring the genocide of proper English pubs.

Without first-time buyers, the property market stalls. That is where we are now. And I do not see it picking up in a hurry. Sluggish economic growth, even more sluggish earnings growth, student debt, uncertainty – all point to a moribund market for several more years, except in Planet London where foreigners call the tune.

Starting with Adam Smith, economists have agreed that rising house prices do nothing to make a nation wealthier. So the end of our love affair with property should be a good thing, and would be if only we could stage a jubilee to write off the mortgage debt (Leviticus 25).

Chris Gilchrist is the joint author of The Process of Financial Planning and editor of The IRS Report


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There are 22 comments at the moment, we would love to hear your opinion too.

  1. Neil F Liversidge 22nd November 2011 at 1:32 pm

    Quality! Superb article. He’s right about the pubs too. I’m making a new year’s resolution to go to the pub at least once a week.

  2. If tax relief for BTL interest payments is withdrawn this then places the market on a more level basis regarding affordability for people buying their principle home without the 40 or 50% tax relief that BTL investors enjoy. This should bring down the prices of typical BTL properties.

  3. “…….people rent while they work in cities and buy when they retire or move to the countryside.”

    This is all very well, but how does a retiring couple fund a move to the countryside and a house purchase there when they have rented all their life, have no property equity to release and have insufficient income to support mortgage repayments?

    People in the UK think of their properties as partial, or in some cases, worryingly, their only retirement planning solution. Making monthly repayments to a mortgage debt (on a capital and interest basis) is equivalent to funding an investement plan for most UK homeowners and tenants do not gain from the increasing value of their homes or from any capital appreciation gained by the debt repayment element of their monthly payments in the same way as a homeowner.

    Rents are likely to increase in line with inflation, so tenants may never have sufficient disposable income to start to save or instigate a pension plan. Homeowners’ monthly repayments become cheaper over time, relatively speaking, and a mortgage borrower’s disposable income should increase allowing them to invest in future years where a tenant cannot.

    I don’t think our desire for homeownership will ever diminsh whilst the potential future gains are so much greater.

  4. Is the last comment from an Estate Agent?

  5. Anon – “I don’t think our desire for homeownership will ever diminsh (sic) whilst the potential future gains are so much greater.”

    I think you’ve fallen for the myth that property prices will only ever rise. Even taking a 10-year view just now that looks highly unlikely.

    The couple retiring to the country could always consider a savings plan to build up some capital to buy a property or, perhaps better still, buy a life tenancy.

    It may just be a coincidence that the most successful economy in Europe has the lowest owner-occupier rates, but I doubt it.

  6. Anonymous at 1.45 pm – absolutely correct! This article is at best laughable.

    As the Government now appreciates, house buying is the foundation of the UK economy. Plus we have a huge population and no one willing to build homes to house then because the return is too low for renting or buying.

    Cut tax relief for Landlords, why should their business be singled out? Does Mr Gilchrist just want to see more people homeless and UK property stock allowed to deteriorate even further by driving out the only people prepared to invest in improving it?

  7. It is the second home owners, who have bought up all the small properties – holiday homes etc, and made them all too expensive for locals to buy, that have pushed up the average house price (at least for 1st time buyers). Make second/holiday home ownership unattractive from a taxation point of view; cue masses of small properties hitting the market, prices deflating to normal levels and then maybe, the housing market will get into gear again. While far too many people own properties they do not live in, properties they pay far too much for, then the underlying problem – a shortage of affordable housing, will persist. Meanwhile, don’t sell the social housing off at massive discount to value, it doesn’t make sense, especually when you have to start building new property because not enoght people can afford private sector rents. Didn’t Thatcher make the same cock up once before?

  8. Anon – Not an estate agent, a mortgage adviser, yes still with a vested interest in the property market remaining buoyant but not blinkered to reality (I don’t think).

    Steve – why should a 25 year old first time buyer who is hoping to build up a retirement fund for age 65 be concerned by the 10-year view? Property prices may not rise in 10 years, but 40 years?

    Yes the couple that plan to rent all their lives and then retire to the country could start saving towards their goal, but they’ll have a lifetime of yearly increases to their rental payments to contend with which will continually erode their disposable income.

    The 25 year old first time buyer could have 25 years of relatively stable mortgage repayments followed by 15 years of payment-free housing before their retirement.

    Which of the two is likely to have the greatest ability to save?

  9. I despair at the naivety of this article and some of the comments.

    House prices will only fall significantly if:

    1. Our population starts declining
    2. Unemployment increases massively

    People have to live somewhere. If they cannot buy, they will rent. If there are more renters, yields will rise and people like me will buy property to let out.

    Does Mr Laird seriously believe it would be possible for a couple to rent all their lives whilst saving sufficent to buy a property outright at retirement? I don’t suppose his comment is anything to do with the earnings he will make from recommending such a strategy?

    And where will these lifetime tenancies come from? What sane investor would buy a property to rent to someone for life at a fixed rent with little possibility of realising their investment?

  10. @Andy I’m not sure if I would agree with removing relief on BTL interest payments, simply becuase it undermines the principle of relief on what it costs to generate a profit and its effect is least on those who already own the most capital.
    That said, I would agree that other measures for curbing the buy to let market should be considered. With average earnings as they are, there is nothing to convince me that the current inlfated property prices would have occured without the BTL craze feeding the lower end of the market.
    Those of us who are already own properties should not be so smug when it comes to young people getting on the housing ladder.

  11. Been reading the economist!!!! – what an excellent read. They have been banging on about this for years, and I dont think they will stop

  12. Chris Gilchrist. The most basic law of economics is supply and demand. More people want properties to live in than there are available so purchase price and rentals will rise. The only currnet choke on the market is the lack of bank funding and that will change

    John Moon 10/10

  13. The next ‘housing problem’ we’re going to have, is what happens to the people who –

    Can’t afford a mortgage,

    Can’t afford to rent (because their benefits are capped)

    Can’t get anything through their local authority (because stocks have not been replenished since the right to buy)

    People will get desperate and it’ll get very messy.

  14. Agree on the comment about making house building easier for individuals – planning currently restricts high quality new-build by individuals while promoting low-quality building by developers/housebuilders.

    Disagree on the Irish countryside where their self-build fascination has led to weird single storey houses and inappropriately massive ‘hassiendas’ as they call them. Planning out of control in a different way.

  15. Great article provoking some good emotionally charged comments. Of course house prices can only go up, people always pay off their mortgage after 25 years, and people never borrow too much. I do love property, always forever my true love.

  16. we are storing up even deeper trouble for the future if a greater percentage of the population rent rather than buy, because when they try to retire the demographic profile of the country will be even worse than now, they will no longer be able to afford open market rents, so where will they live, with the number of pensioners, how will the state be able to assist? We need new solutions before our society disintegrates into chaos. Perhaps the unemployed could be apprenticed to learn refurbishment skills on derelict property, something useful and housing stock, their contribution in labour could be used as a form or deposit and the other benefit would be self respect and a work ethos, property will always need repairs etc, many of the plumbers and builders are coming in from Eastern Europe. ,

  17. I fundamentally disagree with many of the points raised. I now own a property that i could never afford to rent as the result of buying small and trading up as my circumstances changed. When I get to retirement, if all goes to plan, the mortgage will be paid off. In the meantime, interest rates being equal over the med/long term, my payments will hover around an average (it may be a wide band but it’s there all the same). Rents will continue to rise in the meantime.

    My parents fortunately took the risk of buying their council home, their month payments are a fraction of what their neighbours pay in rent. Yes they have upkeep cost but are considerably better off paying less than 20% of what next door does.

    What on earth will tenants do when they retire? In an ideal world the would be disciplined enough to have saved enough over their working life to buy in the country but will they be disciplined enough and will they be able to afford to save with increasing rents?

  18. @ Anon 12:04 23.11

    I agree with your final paragraph. If tenants do not own a property at retirement and do not have sufficient savings then how will they afford ever increasing rents( let alone buy a pad in the country) ? They will be reliant on state support.

    This may suit some people, but I don’t think that this is something to aspire to.

    As to the value of property rising? If it is your permanent residence and you are happy to live there and you have cleared the mortgage, then the value of it is not so important.

    Property as an investment, of course, is another matter.

  19. If your job means you have to keep moving, buying a property to live in and the costs which occur on each move doesn’t make sense as it can wipe out the advantage of owning.
    Buy to lets can be a lot of hassle.
    Commercial property does not match domestic property in price movements.
    To some extent a REGULATED domestic property fund so you could build up your ISA while renting, knowing the excess was directly lnked to domestic property values in the ares you wanted to live, might have some merit.

  20. It frustrates me to read blogs from people who criticise the demand in the UK for people to own their own home and some of the ideas they project as best practice to others (ie rent all your life and then buy when you’re near or at retirement).

    I wonder how many of those people practice what they preach to others and don’t own (or at least have a mortgage with a view to owning) their own home. I bet it’s next to none.

    I agree with David’s comments above about the BTL phenomenon. A flawed system over the last 10 years has allowed a small number of people to accumulate huge portfolio’s of residential property and (subsequently) inflate prices for the rest of us. I’m not knocking those who have taken advantage of the system but, I’m afraid, the damage is now done.

  21. Tax relief on BTL’s is anomalous when there is no relief on home purchase. Do away with it and the final vestige of ‘you can’t lose money on bricks and mortar’ is put to bed. The whole UK economy has been steered/wrecked by the housing market myth and it needs to be put away once and for all.

    There is no wealth creation here just short termist easy money syndrome.

  22. properties for sale in tenerife
    Good work. I like that keep it up.

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