No topic gets British people animated like property. It goes beyond a national obsession.
The trouble is that too many of us are poisoned by past glories in this market. From the mid-nineties right up until the financial crisis of 2007, the housing market created millionaires up and down the country. And it changed us.
On Friday we looked at the characteristics of a 'sentimental investor'. That's an investor who is impassioned, loyal and a little bit stuck in the past. I would argue that that accurately describes the average UK property investor as well.
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The trouble is that sentimental investors often come unstuck. And right now there's a classic sentimental trap that property investors need to be wary of. Today I'll explain what that trap is. And I'll point to four factors that could make UK property a nightmare investment for the next four years.
The second time is never as good as the first
Many sentimental investors delude themselves by thinking that the immediate returns on the investment are irrelevant. "I'm investing for the very long-term; and anyway this isn't an investment it's a home"
Of course there's merit in that sentiment. Quite rightly there's a very special place in our hearts for the bricks, mortar and slate that provide our shelter.
But for most of us, a house is most certainly an investment too and a big one at that. You just can't escape this reality. I bet many homeowners are relying on housing equity to provide some funds for their eventual retirement. And even if they're not, the local councils certainly are!
After a savage ten years in the stock market, many investors will be hopeful for another run in the housing market. They're encouraged by the fact that buy-to-let investment is still on the up and house prices have proved remarkably resilient throughout the financial crisis.
But this is very dangerous territory.
The trap: This bear market could drag on for years
A decent bull market takes a new generation with it. It's almost as if the market wants to teach the new generation about the merits of a particular sector or asset type.
So you end up with long bull markets in anything from gold, industrial commodities, stocks, and, yes, houses. Some cycles are longer than others and hoover up more devotees.
But once the great bull is done for, it can grind downwards for years. And after it has, it can take decades to come back into vogue. That's the trap. The second time around is rarely as satisfying. And especially not this time.
Four factors that could destroy the housing market
The clear and present danger is interest rates. Even with rates pegged to the floor, house prices are barely treading water.
At the moment, the markets seem to be impressed with the UK's financial stewardship. They're happy to let us all borrow at an incredibly sympathetic interest rate. But things can change quickly in the financial markets. Let's not forget that our economy is vulnerable to a massive banking industry.
Eurozone trouble will inevitably lead to trouble for our oversized banking industry. Who knows exactly how things will pan out, but an emergency rise in rates will throttle the housing market.
That's the worst-case scenario. But even if rates stay low, mortgages are still tough to find most of the banks want to shrink their loan books. On top of that, the FSA has promised to crack down on the size of mortgages they'll allow our banks to lend homebuyers. New rules and regulations make the loose lending of bygone years impossible.
But maybe a bear market in houses will have nothing to do with lending and interest rates.
I read in the Telegraph on Friday that estate agents reckon a third could be knocked off some house prices if the government's new planning regulations are adopted. Basically, the government wants to get rid of the many of the restrictions that currently stand in the way of new developments.
UK housing has been under-supplied for decades. If the government can change this dynamic, it'll surely have a negative effect on prices.
I am also concerned about demographic changes. Immigration has undoubtedly fuelled demand for homes. But immigration is likely to slow and possibly even reverse. Whether that's down to government policy, or the fact that the UK is no longer quite so attractive to migrants remains to be seen.
Markets can crash (as I think likely with a sudden rise in rates), or they can grind down slowly as economic forces and long-term changes slowly take effect. And in the case of housing, the market can even flat-line for years while inflation takes a chunk out of it's real value.
Why we need an eight-year bear market in property
I know that times are incredibly tough for stock market investors right now. And the outlook doesn't exactly look rosy.
It's therefore tempting to head for the perceived safety of housing investment. A market that looks incredibly resilient.
But I think that could be a costly mistake. Up-sizing, or putting your savings down on a buy-to-let right now looks to me like a risky move. It's a classic trap for sentimental type investors.
This market has got to play hard-ball with the latest generation of housing bulls. History suggests we need an eight-year bear market to drain off the over-exuberance built up during the 16-year bull. That means it's four years down and another four to go.
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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