Article length: 821 words
Article difficulty: 6 school years
Some of the over 50 financial flaws of the mainstream school of thought relate to property. With REAL Financial Competence you can identify and disarm all of them. For example “Property is the safest investment”, “Property prices will always go up, at least in the longer term”, and “Property is the most profitable investment”. All these assertions are Flaws of the mainstream, and this article documents why.
REAL Financial Competence, asset types, yield types, economics, risk factors
Assertions of the mainstream:
“Property is the safest investment”, “Property prices will always go up, at least in the longer term”, and “Property is the most profitable investment”.
Why these are all flaws
These are dangerous assertions because they require three core competencies the vast majority of people don’t have. Paradoxically, exactly those people who make these assertions. The competencies required are part of REAL Financial Competence:
- First, an understanding of the various asset types and their underlying economics.
- Second, an understanding of risk and risk factors.
- Third, an understanding of yield and yield types.
Property is what is called a Tangible Asset. This means property is characterised by a fixed physical amount of wealth (or rather debt in the case of most people). The price of Tangible Assets ultimately depends on supply and demand. For Tangible Assets, for everyone the profit expectation is based on speculation, namely the hope that at the time of sale demand will outstrip supply for that type of property, and that an actual sale at a profit will be possible. This is far from likely: The more people have their own property, the less interest is in your property, and hardly any scarcity.
You may want to argue: “Even if people already have their own property, they will continue to invest in buy-to-let property.”
No. You need to think it through: The more people have their own property, the less people need and want to rent property. The less people need and want to rent property, the lower the achievable rent. The lower the achievable rent, the lower the yield for a buy-to-let investor. The lower the yield for a buy-to-let investor, the fewer people want to be a buy-to-let investor. The fewer people want to be a buy-to-let investor, the fewer potential buyers for your buy-to-let property. The fewer potential buyers for your buy-to-let property, the lower the achievable price. Then you may still find a buyer, but not at the price you desire.
When supply outstrips demand, the price will no longer go up but will go down. For this very reason, in many geographical regions property prices in general have no longer gone up at all over the past decades. Sooner or later, this will happen in your region too.
You may now want to retreat further and argue: “But not in my area. Here, property prices have gone through the roof in the past, and I am convinced they will continue to do so in the future.”
That argument is even worse. Why? Because, the more prices have gone up in the past, the less likely that they will continue to go up in the future! The next downturn is always certain. What is not clear is its beginning and its end. If you have bought property, you cannot benefit from future downturns.
Were property “the safest investment” then it would bear least risk. It does not. Property clearly bears more risk than some other investment types. Just think of the high “wealth” (or debt) concentration in a single asset and location, and that a one-off investment prevents you from benefiting from subsequent market crashes.
Also, the longer you keep real estate property, the more follow-up payments are required too: for repairs and maintenance, refurbishments, restoration, service cost, insurances, taxes, and interest cost (as mortgage or opportunity cost). While the media with its comparisons of a current price and a historical price often suggests that a high profit was made or would have been made with real estate, in fact a high profit is hardly ever been made with real estate! But to realize this yourself you must have learned to consider all costs, including opportunity cost, and you must be able to calculate and to compare true yields, not prices.
Note that risk is a subset of yield. Long-term, the yield of property is suboptimal, and it will remain so for the future because of the underlying economics of property. Real estate is dead bricks and mortar, there is no productivity involved in existing property. Regardless how much speculation may push the price of real estate beyond its economic substance in the short- and mid-term , in the long term the yield of a productive asset will naturally be far higher than the yield of an unproductive asset like property.
As if all of that wasn’t already enough, another downside of property is its limited flexibility: Although in future you may want to retain your property, when your life circumstances change you may desire or require more flexibility. A further downside of property is its limited convertibility: At some point in future you may want (or need) to exchange your property for a different investment, and at that time you may be unable to do so.
Some of the financial flaws of the mainstream relate to property, and all such assertions can easily be proved wrong if REAL Financial Competence is applied.
© DBMG Bennett 2000 – 2010. http://Affluability.com has far more for you. Note that we do not give any Financial Advice, instead we raise your Financial Competence. Financial Advice helps others to sell financial products, Financial Competence helps YOU to think for yourself. Choose what you want. If you want to acquire REAL Financial Competence to change your life forever and FOR REAL go to http://Affluability.com now.
© D. Bennett 2000 – 2010. All rights reserved.