A House in Ealing

My wonderful mother-in-law and (step) father-in-law are currently visiting.  Last weekend Duncan was sitting outside enjoying the beautiful Cayman winter, iPad in hand, writing his life-story.  He is 86 years old and has had a fascinating and rich life.  Whist pondering his life, he tells me that his father bought a terraced house in Ealing, London in 1930 for £999.  Duncan had recently visited his old street and seen these same houses now selling, ninety years later, for £650,000.

Wow – what an amazing return.  £999 to £650,000. 

Or is it?

Let’s break it down.

If you had purchased this house in London in 1930 and sold it 90 years later you would have generated an average annual return of a little under 7.5%.  That’s a very healthy return.

However, the price of goods in the UK has gone up by just over 60 times over the past 90 years.  That’s a increase of around 4.7% a year.  Your return over and above inflation was therefore 2.8% per annum (7.5% less 4.7%).

We call the return over and above inflation the ‘real’ return because it’s the only return that actually matters.

A real return of 2.8% per annum.  That’s ok, but certainly not amazing.

How much does it cost to maintain a home?  Experts suggest that you should plan to spend between 1-2% of the value of your house every year on repairs.  If you don’t maintain your home it won’t maintain its value. 

That figure takes into account normal wear and tear of a property.  It doesn’t take into account losing a house during the war. Ealing was heavily bombed in the Blitz and a bomb landed two houses down. The roof fell in and although Duncan cannot remember, we can assume that bombs falling on your house was not covered in your house insurance.

2.8% less repairs and maintenance, less a war. Bingo, your return has pretty much gone.

As a comparison, the S&P 500 (the broad measure of the US stock market) has compounded at 10.2% per annum (with dividends reinvested) since 1930.  That return turns $999 into $6.25 million.

I am not trying to showcase the US against the UK (I use the US stock market because the data is more accurate), but I am showing you the power of investing in companies as opposed to bricks and mortar.

We all need somewhere to live.  And sometimes it’s nice to have a holiday cottage or second home (or third or fourth, if you can afford it) somewhere.  But one of the most powerful things you can do for your long-term wealth is to stop thinking of property as an investment and realise that investments are actually investments.

Georgie

georgie@libertywealth.ky