There’s a assumption that comes up almost every time property investment is discussed: the belief that property goes up in value.
But…why does it go up in value? That’s what we looked at in this episode.
We broadly talked about three reasons why properties in the UK tend to get more expensive over time:
- Constrained supply and growing demand
- Access to lending
- Fear and greed
We unpick all the individual factors within those reasons, and compare the UK market to Germany, Spain and the US (if only so Rob D has an excuse to book more holidays in the name of “research”). Listen to the episode to get all the details…
Resource of the week
This week’s resource is a bit of a cheat – we’re not going to change your life by telling you there’s a website called Rightmove, but we will be teaching you all our tips and tricks to use it more effectively in a special episode next week
This week’s news
A study this week reported that only 45% of people are saving enough for retirement. Optimistic, we think – but Rob B showed remarkable restraint in keeping his “why the state pension is a ponzi scheme” rant down to 30 seconds.
We also mentioned new criticisms of the government’s Help To Buy scheme, which we talked about in detail last week.
Tell us what you thought of the show!
Do you agree with our analysis of why property prices go up over time?
Did we miss anything out, or was there a part of the show you particularly enjoyed?
Just let us know by leaving a comment below!
If you enjoy The Property Podcast, please leave us a review on iTunes
Reviews are really important in helping other people to find the show, so by way of thanks we read out every single review we receive.
Ric: Welcome to The Property Podcast, the home of news and debate about building long-term wealth from property investment for beginners and experts alike. Now for your hosts; I keep asking if I could take up real estate but they tell me that’s not how you guys do it over there. It’s Rob and Rob!
Rob Bence: Welcome to The Property Podcast episode thirteen! Unlucky for some, but definitely not for our listeners, I hope. Rob, how are you?
Rob Dix: I am ze gut, danke. I am in Berlin. Luckily for all our listeners this stupid language stuff at the start is going to stop because I’m in Berlin for two months so you won’t be subjected to any more of that.
Rob Bence: Danke.
Rob Dix: Berlin is a very different property market in Germany, from the UK of course. That is going to play in slightly to our topic this week which is, why does property go up in value? Because it does over the long term. We kind of just naturally believe it goes up, so we’re going to dig into why that is the case. We’re also going to be looking at the news of the week, of course. And we are going to be previewing a special episode next week with our resource of the week!
Rob Bence: Every week we do the same, but that’s because we really do appreciate your support. We like to thank by thanking some of our listeners for their support with the iTunes reviews. This week is no different, so without further ado we’d like to thank the following for the lovely reviews they’ve left us.
RJ Smart says, “Thanks, Rob and Rob! You’ve help me purchase my first buy to let – “
Rob Dix: Hey!
Rob Bence: Yeah! Fantastic! He sounds like he’s got an awful life; he says, “I work abroad on a super yacht and you’ve shown that I can manage my property from a distance.” RJ Smart, we slightly hate you. I’m only joking. Fantastic! Well done on your first buy-to-let, that’s brilliant news!
Patti says, “Brilliant! Just bought my first buy-to-let.” Wow, this is incredible! “Just bought my first buy-to-let. Initially a money drain to be honest, with the renovation but now it’s let out I’ve seen the fruits of my pain. The podcast gives me a reason of why I’ve invested; very motivational. I’m already thinking on my property investment number two.” This is brilliant. “Marvellous! Two genuine guys giving valuable information for those interested or active property investors already. Great format, information presented in a fun and simple way for all to understand. Look out for big things.” Thank you very much!
Jonathon says, “I’ve really enjoyed your discussions. Even for experienced property investors your show provides motivation to work harder on resetting goals, getting on with it. I’m sure at some stage when it’s a tunnel discussion about personal or company structures planned, keep up the inspiring work!” Jonathan, we will definitely get there. We don’t plan on going anywhere away soon. We’re going to cover all these subjects; we’ll take that on board and we’ll definitely cover companies or buying as an individual in a future episode, absolutely.
Thank you, everyone! There are some brilliant reviews, especially those guys that just started investing. That’s just brilliant.
Rob Dix: Yeah, it’s amazing! We’re on episode thirteen and we’re already hearing about people taking action and that is just absolutely fantastic. I can relate to the review that said the first buy-to-let is a bit of a money drain. At the moment I’m going through the same thing; going through a refurb and doing bank transfers and crying slightly inside. It all becomes worthwhile once it’s up and running, trust me. It’s great to hear about experienced investors listening to us as well because for sure they don’t need our help but it’s always nice to hear what other people are talking about and I guess get more property into your life. If you’re as obsessed at property as we are, you can’t listen to or read enough about it.
Saying that, you’ve been a bit distracted from property this week I believe, Rob; because of a certain occasion.
Rob Bence: Yeah! Forgive me, Rob but it’s my thirtieth birthday so I didn’t dedicate twenty-four seven to property this week. I apologize listeners, but I took some time off for my birthday which was very enjoyable because the sun was out and it was lovely. But I’ve got nothing to relate about property, too. What I will say is Rob’s alluded to a future episode coming and I’m proud to say – or happy to say – we’ve got a little bit more meat on the bones that we can tell you about.
What we’re going to do is we’re going to record a live show. We’re going to invite listeners in to a webinar and we’re going to get them all on board and we’re going to allow them – for a whole episode – to just ask us questions. We’re going to answer as many as we in half an hour and it’s going to be live. For a hundred people – the first hundred people to subscribe – they will be able to listen to the show live; you’ll hear our blunders that our editor fantastically takes out, hopefully still feel inspired by the end of it and be part of the show. We’re really, really excited. We’ve got thousands and thousands of listeners; unfortunately we have to restrict it to a hundred people because it would just get crazy otherwise.
What we’re going to do is we’re going to email the database out first then we’ll put it on our website. As soon as the hundred places is full we’re going to close the door. We have to do that just to keep it simple and achievable for us to operate. In the next three episodes we will be recording that so if you’re not on the mailing list, get in there because we’re going to be emailing that out in the next few days. Please do get involved. We’d love to have you as part of the show. It’s going to be really exciting. We’re not sure if this is a good idea or absolute entertainment suicide but we’ll do our best anyway.
Rob Dix: Trust me; even if you don’t know anything about property it will be worth it just to hear us start the show three times, make up words and all these kinds of stuff that you don’t normally get to hear. So definitely get in on that; I’m sure you will learn a lot about property as well.
I have just arrived in Berlin this week as I’ve just been saying. I’m going to be here for a couple of months, as well. Whenever I arrive anywhere new, I’ve got a bit of an addiction. I start digging into the property prices and everything else, of course. The interesting thing about Germany is that whereas since 2000 prices in the UK in real terms are up about fifty-seven per cent or something but in Germany they’re actually down ten per cent. In Berlin, much like London there’s a kind of a micro-market that’s very different from the rest of Germany. In Berlin the property boom is only just happening now whereas in London it’s happened for various reasons London prices are continuing to be strong. But in Berlin, you look at the papers here and you’ll see articles written about it in the same way in London a few years ago. At the moment it’s a very, very affordable city. Right in the centre of town you get artists and retired people living on very low rents and there’s lots of different discussion about whether that’s going to change because you get lots of Europeans from places like Greece and Italy coming to look to Germany for safety. Berlin obviously like London is a capital city and comparatively underpriced. It’s really interesting just to see how that’s going to play out.
Other than that, this week I’ve dragged myself kicking and screaming into 2007 by joining Facebook. If you want to join me on there, go to facebook.com/propertygeek where I’m doing my best. I’m not much of a fan until now, but I’m giving it a go. So please come and like me so I’m not all on my own; facebook.com/propertygeek.
Rob Bence: I’ll come and like you Rob, but I hate Facebook.
Rob Dix: I’ll quietly shut it down in a few weeks. I’m doing my best.
Rob Bence: It seems to get more adverts than posts; it’s ridiculous. Maybe we should do a “Why We Hate Facebook” episode, just a rant for thirty minutes but I’m sure that might not be appreciated. Instead, we’ll do news of the week.
A couple of items this week. First of all, there’s been an interesting article about the pension crisis. We’re not going to go on too long, but for those of you who don’t know; RMP Property – RPM actually stands for Rescue My Pension. I’m quite passionate about the pension crisis and how bad it is because I think it’s important that everyone should know. This articles shows that only forty-five per cent of people are putting enough away for retirement, so that means fifty-five per cent of people either are not putting anything away or are not putting enough away. Actually, I think those figures are optimistic. I personally believe – because I speak to a lot of people day in and day out – that number is actually a lot higher. I think more than fifty-five per cent won’t be able to retire at sixty-five or even seventy because – here we go, the thirty minute rant on the pension crisis but I’ll try and roll it into thirty seconds instead – people are living longer so annuities pay out less. People are going to have to accept that sixty-five is the new fifty. I know people go, “I’d like to retire by fifty.” Soon, sixty-five will be aspirational; mark my words. It’s already happening and it’s something that can’t really be altered because the pension crisis is something you can’t avoid. You can if you take action and invest. But in terms of just putting money away month by month and hoping that you’re going to have enough to retire by. State’s pension is a ponzi scheme as far as I’m concerned. People think they’re saving money for the future, but actually the national insurance you pay is only paying for people who are already retired; and more and more people are retiring. Where are the funds going to come from?
There’s my rant, Rob. I’m going to stop but the pension crisis is awful; do something.
Rob Dix: That was admirably restrained. I agree with you there. I think that those figures are optimistic. I saw some figures about the US recently and they were far worse. I can’t remember the number but basically, barely anyone would be able to retire. I can’t see why people in the UK would be dramatically more prudent than that. It does seem a big problem and by listening to this podcast you are doing the right thing because as we always preach, it’s about taking control of it and doing what you can and taking responsibility for your own retirement rather than just crossing your fingers and hoping that everything will magically sort itself out.
Rob Bence: Okay. The second article was really relating about what we talked about last week. We talked about the “help to buy” scheme. The “help to buy” scheme has had a bit of criticism and it comes from that it’s going to drive prices up. What people are saying; the respected journalists and the comments they’re saying is that the real issue with property is the supply. There’s not enough property being built so instead of the government funding first time buyers what they should be doing is funding new properties because that will help property prices maintain where they are or maybe even slide slightly so it then becomes more affordable for first time buyers. The government has not chosen that approach. What they’re chosen to do is bring more first time buyers into the market but with the same supply. Therefore, property prices should increase; which Rob would take us nicely to our topic of the week, doesn’t it?
Rob Dix: It really does; because we’re asking this week why property goes up in value? We’ve often just take and read it as it does and we’re going to dig into why.
Broadly, we’re identified three reasons why property goes up in value over the long-term, subject to all normal caveats about it; not just going up nice and smoothly and everything else.
The first part of that is supply and demand that you’re just been talking about. That’s something that moves every kind of free market. There’s then fear and greed; emotion I suppose you’d say. That’s another component that often moves the market. Then you’ve got the lending side of it as well, which I think you could term as access to the market.
We’re going to run through each of those and talk about how those factors – and factors within those factors – affect the prices of property.
Let’s start with supply and demand. Economics 101 – as the Americans would say – is that supply and demand set prices. If you’ve got a fix supply of something and more people want it then the price is going to go up. Or if suddenly supply reacts to the demand and suddenly a glass of stuff is available then the price is going to go down. That is basic economics affects absolutely everything. That is probably the biggest influence on house prices because in the UK especially, we’ve got a pretty set supply and demand that can vary. Rob, there are kind of two supply sides and two demand things that we’ve identified.
The increasing population is the first one you hear a lot about.
Rob Bence: We are growing as a country. There’s lots of people coming into the country but also, please are living longer, something I just mentioned earlier. That therefore creates an issue with the supply and demand. If there’s more people but the amount of property stay the same, then property prices will move up because there’s more people trying to get the same supply of property. As the population increases because of people living longer and open access in the EU so people will be able to come in and out of the country, then property prices will rise accordingly. It’s not something like suddenly a few more people will come in and property prices rocket; this is a long-term effect. Generally, supply and demand has a long term effect with all of this but the increasing population has a big factor on that.
The second thing is change of living habit. From the Victorian ages through to the Second World War it wouldn’t be uncommon to see households of six, seven, eight, nine or ten people living at home; even more. Now, our way of living has changed. The average household is less than two people. People like their space, they like their own homes, they like their independence; that’s fantastic but that means that we need more properties than we did before we’re not prepared to fill houses with half a dozen or even a dozen people because our ways of living – our living habits in this country have changed. That also has pressure on property prices because again, there are more people trying to buy the same amount of property.
Then we move on to the supply. Not enough is being built in this country. We talked about the Barker report before that says we need to have about a quarter of a million homes built each year just to keep up to current levels. At the moment we’re building just over a hundred thousand so not even half. Because we’re not building enough property and supply is still restricted, then property prices again push upwards. There are a few things there; increase in population: more people trying to buy change in living habits: more people trying to buy and we haven’t got enough being built. Therefore, the amount of property stays relatively the same or not enough; we’re actually lagging behind what we need.
But here are a few other things as well, Rob.
Rob Dix: Related to the fact that not enough is being built and the reason that there’s not a lot getting built is partially due to the very strict planning laws that we’ve got in the UK. For a start, there’s a finite amount of land anywhere: there’s the green belt rule and there’s everything else. It’s not easy to get planning permission for lots of different developments. Everyone kind of knows that we need to be building more, everyone looks at the figures and every time its, “Oh yeah, we’re behind out target. We need to be building more.” But no one actually wants some big development to be built near them. If we need to hit this target there needs to be a dramatically more house build. This isn’t just about making a little bit easier for people to build an extension or do whatever. We’re going to need dramatically more homes and at the moment the planning laws aren’t making that possible. There’s going to be a lot resistance to changing those laws because residential buyers like the idea of getting more properties that’s cheaper, more affordable and everything. But no one wants to have their lifestyle affected by it. Planning laws are an issue.
Another thing that kind of gets overlooked, I suppose is the mindset of home buyers. In the UK, we’re a real nation of home owners. It’s a real aspiration from even when you are a kid you are taught that you want to own your own home and that’s something you really, really aspire to. Being in Berlin as I am at the moment, I’ve noticed that – well, I didn’t need to be told – but it’s really true for the people I’ve spoken to so far that just doesn’t happen. The rules are very different and the mindset is very different. It’s incredibly common for people to just rent their home all their life and be perfectly happy with that. Tenancies are set up so that tenants have a lot more rights. That’s actually been tipping a little bit in recent years; there have been more moves in Berlin since reunification towards people who want to own their own home. But it’s still far more a nation of renters than the UK. Because people in the UK want to own their own home that means a lot of the normal economic or logical arguments will go out of the window. If people possibly can buy, then they will. If home ownership does drop; Rob, do you think that investors will just pick up the slack anyway?
Rob Bence: That’s true. But first of all, Rob I’ve got to say; your dedication to the podcast is admirable. You go to Germany just to have a homeowner’s point is fantastic. We appreciate it, Rob. He’s moving countries just to make a point.
Rob Dix: That’s true. If we need to make any points about the Caribbean or Seychelles or anything, I’m very happy to do that. If we could try and tie that in for a future episode, that would be great.
Rob Bence: If anyone would like to sponsor a Caribbean issue of The Property Podcast, then we’re more than happy to be flown on first class. Please do get in touch; I’ll stand by the phone.
Okay, back to the serious business of rent increases and investors and so on, the point I was going to make is that some people say, “What happens if we have a cultural shift and we do become renters instead of property buyers?” Actually, the property prices would still increases and here’s why; if more people go into renting then rents rise. It’s supply and demand again. If rents rise then returns become better for property so what happens? Investors buy. That’s not a solution to the problem here. Some people say the rise in property price is the problem, some people say it’s an opportunity. It depends on your mindset; I say it’s an opportunity. That’s not going to change the opportunity because property prices will still move upwards because more investors come into market. Whereas some people may have not come in because returns were six or seven per cent. If the returns rise to double-digits perhaps then that may say people with cash in the bank necessarily don’t think about the long term but think, “I’m going to get better returns on my money than the banks.” They’ll stop buying properties and therefore prices will increase again. There’s no quick fix to this, there’s no real way that you can say, “Okay.” Unless they suddenly build ten more Milton Keynes all over the country on a regular basis and start building property all over the Green belt areas which I can’t see happening any time soon then we’re going to still have the supply and demand issue ongoing and I don’t really see that changing at any point in the future.
Rob Dix: The whole weird thing with property is an asset class and also something that everyone needs. They’ve got all these really weird combination and factors on the supply and demand side.
Moving on; another of the factors that we mentioned that affects properties going up in value is lending which is the access to the market. We talked about lending a little bit last week when we were talking about the new government schemes that are going to make lending a bit more accessible. Lending is tougher now than it has been in recent years; you need more of a deposit and the criteria are stricter and everything else.
On the whole, when it’s easy to buy people will. We saw that before; we saw that when you can get a hundred and twenty per cent mortgages so there are people giving you all the money you need to buy a house and more. There are a lot of people who aren’t going to say no to that. On the investment side, there are buy-to-let mortgages of course. They used to be far easier to come by; you could self-start. But even now it’s relatively easy to get funding to buy property compared to before buy-to-let mortgages existed when you just had wholly in cash. Because of that lending, people are always going to be willing to buy property as long as it’s relatively affordable. For the banks and financial institutions, they’re going to be happy to lend on property because it is a physical asset that if they need to they can repossess and they can be relatively sure that it can withhold its value. There’s been lots of debate recently about how the banks aren’t lending enough to small businesses and that’s because small businesses are risky. If you lend to a business, you can’t be sure that it’s going to work. They might go bankrupt and as the lender you lose all your money. If you lend money to people to buy a property, even if they bankrupt and it doesn’t work out its very, very unlikely that the housing market would have collapsed in the meantime and everything will have lost ninety per cent of its value because of all the supply and demand factors we talked about a minute ago. Because that lending environment exists – and it fluctuates, on the whole it exists – that means that property prices will broadly go up in value because people will have access and the means and the willingness to buy.
Rob Bence: The final factor we talked about is fear and greed. Fear and greed drives all markets, not just the property market. The fear of missing out and the greed of making more money; it depends on mindset. It doesn’t mean you’re a bad person if you come into fear and greed, it’s more of a general populous; we’re all driven by it one degree or another.
During the booms of ’01 to ’07, 2001 to 2007 – we saw this a lot with different markets – the UK’s dip happened slightly. A lot of it was driven by the two preceding factors we talked about: easy lending and not enough supply, supply and demand. But in other countries fear and greed completely drove the market. The good examples of that would be Ireland, Spain and Dubai were they just built property that they didn’t actually need because people were buying it and investors think they were going to miss out so the property prices kept going up. Suddenly you’ve got loads of towns and cities that are lying empty because people were just buying property thinking that people were going to just turn up and start living in it. It didn’t happen. The music stopped, everyone looked around and thought, “What have we done? We’ve been crazy.” That craziness seemed normal at that time but that normal was driven by fear and greed. It’s not to say that people on those countries are greedy or fearful, it’s just the market’s moving; that’s what happened there. And it wasn’t just those three countries, by the way. It was a lot of countries around the world including USA as well. That’s a big factor of driving property prices. It wasn’t so much the UK that was affected by fear and greed during the last boom, that was easier lending and supply and demand but it did affect a lot of other countries.
Rob Dix: That’s a nice way of summing it up because we talked about prices going up and it all comes down to largely supply and demand. In the UK the supply is always going to be constrained by geography, in nothing else. You got all these factors, which over the long term are pushing prices up; you’ve got the factor that people can use it as an investment. They can get the money to use that investment and there are good reasons why they’d want to do that. You’ve got the fact that living habits have changed so households are getting smaller; you’ve got the fact that the population is going up. All these factors are pushing prices up, but you’re not going to get that sudden glut of supply like you got in Ireland or Spain. You’re not going to get hundreds of thousands of properties suddenly pushing up. For that reason, it’s kind of hard to imagine there being a generalized UK-wide housing crash in the same way that you’re not going to get Manhattan pricing crash because it’s a place that a lot of people want to live and it’s a set geographical size; it’s not going to get any bigger. That’s why property, on the whole goes up in value over the long term.
We should probably do our normal little caveats, Rob; saying that we’re not predicting that prices are going to rocket away or we’re not saying that this is always going to be the case but if you take a long term view then it’s probably a fairly safe bet. You just don’t want to be looking at investing over the next two or three years or anything.
Rob Bence: This might all sound exciting like, “Yeah let’s get on the property bandwagon because it’s a supply and demand.” Yes, we believe in it so if it works for you, do so. But, it’s very much long term. There are short term factors which can affect the market, that’s why if you take a long-term view you’ll do a lot better.
Rob Dix: That leads us on to our resource of the week, then because on the basis that property is probably a good idea and continue being a good idea, you’ll need a way to find these properties.
Rob Bence: I’ve given it away, but next week we’re going to talk about Right Move and how to use Right Move for property investments. Our resource of the week this week is Right Move. We’re not going to say much more than that because it will spoil next week’s episode, but have a look at it if you don’t use it already and start digging into it. You’re going to find some of the sneaky little features that we will talk about next week. Right Move can be a great asset to your research armoury and we’re going to talk through the sneaky little tricks that we use Right Move for to research property investment, to make assessments on whether we buy or don’t buy. There’s quite a lot you can do, it’s more than just doing a basic search so we’re going to go into some detail and some of the services Right Move offer as well. I have to say, we’re not being paid for this. We haven’t got shares in Right Move; it’s just that it’s a tool that we both use on a regular basis we thought, “Why not? Let’s do an episode on it.”
Rob Dix: You don’t use it as much as we do without picking up a thing or two. I know you said before that whenever you’re facing a task you don’t particularly want to do you’re suddenly distracted and go, “Oh let’s just look at Right Move and see what’s happening over there.” I do exactly the same thing so along the way we’ve picked up some things that might be useful and help you use it a little bit more efficiently.
Rob Bence: Okay, Rob. I think that’s it for another week. It’s been a good episode, I enjoyed that and it’s good that we’ve looked at property investment and why it goes up. So it’s not just making that assumption that property goes up, it’s good to know why, the background behind it and hopefully that come across well today and you’ve got the reasons behind it. It’s no longer just saying, “Oh, property goes up”, you’ve got all the background knowledge now to know why it does.
I really enjoyed that, Rob. And I’m really looking forward to next week as well.
Rob Dix: We’re going from the really, really big picture this week down to the real nitty-gritty of how to use a specific tool next week. It’s nice to cover a lot of ground and we should say of course that if you want to look at the show notes for everything that we’ve mentioned this week you’ll find that at thepropertypodcast.com/13. While you’re there you can leave a comment on this episode or you can leave a voicemail which still no one is doing. Will someone please get other voices other than us rambling on the show and leave us a voicemail? If you’ve got a question or a comment or anything else, you can email us which is great and people do and we love that. But why not get your voice on the show while you’re at it?
Rob Bence: We get emails every day, we get reviews most days so we really appreciate that and we love talking you. But come on; get your voice on the show. Who’s going to be first?
Rob Dix: And sign up for the mailing list, of course. You’re going to be first in line for the special episode we’ve got planned.
Rob Bence: Yeah, I’m really excited about that and it’s going to be a good one.
Thank you for listening! We will join you again next Thursday but until then, have a good week and we’ll speak with you soon. Bye!
Rob Dix: See you next week!
Ric: Thank you for listening to The Property Podcast! Don’t forget to check out the show notes and join the mailing list at thepropertypodcast.com.