Investing in Property Doesn’t Create a Productive Economy

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Nick Moules
19th November 2013

Nick Moules says Help to Buy is a logical policy for stimulating the economy in the short term, but the cupboard full of gremlins could be full to bursting when it ends.

The furore surrounding help to buy is causing many to question the long term health of our economy, as well as the wisdom of inflating house prices. It’s a fact that there is a bubble growing, at least in London and the South East, regardless of what the MPs tell you.

A friend of mine was recently gazumped on a property in London. It’s a term we all heard regularly in the previous bubble and conjures images of would-be homeowners stretching to eight times income to land a mortgage on their dream home. We all know what happened next.

In this instance, an offer on a three bedroom house in East London was beaten by a better offer – it happens. After the weekend passed and determined to find an alternative, my friend found comparable properties in the area were now £10,000 more expensive. This meant at least another £2,500 to find, which isn’t impossible, but over a weekend is a bit galling. He hasn’t dared to look since and this was a month or so ago, but you can safely assume it will have increased.

Clearly this is unsustainable, and the Government would struggle to put any more cash into the scheme, if nothing for the political backlash it would generate.

But house prices across the UK are not increasing as much as investments, especially in peer-to-peer. And that, is a good thing.

As a populace we have a deeply-ingrained obsession with house prices, which is very unhealthy. The sooner we can wean people off the notion that if they buy a house then they will make money, the better off we will all be. No-one’s pretending it will be easy of course, especially as falling house prices don’t sell newspapers.

Houses are a largely unproductive asset: they don’t produce anything and investing in them actually enriches banks more than it enriches those that masquerade under the title of owner, even when their % entitlement is little more than the box bedroom at the back. The hidden costs of buying and selling really stacks up and you have an enormous liability as well as an asset, which can be avoided elsewhere. The Government might consider removing tax breaks, especially on residential houses (whose growth is tax free) so that choice is free.

People would then invest more in companies, where the capital is put to productive use, and returns will then be even higher. And houses will be cheaper and more affordable.

Without looking hard at the incentives for lending or investing in companies as a country, we’re just setting ourselves up for a fall in a couple of years time and an economy dragged around by house prices, like a cowboy at a rodeo.

It makes sense to own your own property as somewhere to live, but there are more productive assets. Don’t whisper it quietly either, people need to know this.

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