Three subjects never fail to upset my readers and guarantee a sack load of abusive letters. The three are: implying that anybody with ahouse full of pets is mildly peculiar; claiming that inheritancetax is a good thing; and arguing thatproperty is a bad investment.
So let me tell you about the nutter who owned a dogs' home and wanted to pass it on to his children...
I am joking. But I was not joking three weeks ago when I said that I believed land prices were certain to fall. Back came my readers with predictable ferocity. "Look at all the money I have made on my property portfolio", said one. "Tom has a poor grasp of economics", said another. So much for my University degree!
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But with the annualIsa investment decision now upon us, I for one will not be putting any of my investmentfunds anywhere near property. People always delude themselves about this. They boast that the house they bought for £100,000 is now worth £200,000. But they forget to mention the costs of buying it, of furnishing it, of repairing the roof, paying the council tax and insurance and the £20,000 that they spent on the new conservatory.
Property investors see what they want to see
And they delude themselves in other ways too. A 2008 study by a group of academics in the USA compared people's estimates of the value of their homes with the amount they actually got when they sold. The study concluded that homeowners, on average, overestimate the value of their properties by between 5% and 10%.
"While most individuals overestimate the value of their properties", the study revealed "those who bought during more difficult economic times tend to be more accurate".
On the other hand, those who buy their homes when prices are high and rising - which applies to most UK home owners - expect that this happy state of affairs to persist and are prone to being over-optimistic. This is an instance of 'investing by the rear view mirror', by which our view of future trends in asset prices is biased heavily by recent experience.
We see what we want to see. If our financial hopes for our old age rely upon the value of the family home, we convince ourselves that property is a great investment. We convince ourselves that it is safe, even if it might not be.
Despite the collapse of house prices, another survey found that two-thirds of Americans rate property as a safe investment. This even applies to those who, having seen the value of their home fall below the liability of their mortgage, have certain evidence that it is not.
House prices simply must come down
I don't buy any of the arguments for investing in property. In this country the housing market is artificially supported by low interest rates. I am sick of hearing house building executives and estate agents moan that if only the banks would lend more money the housing market would be fine. The housing market is under pressure not only because the banks have finally come to their senses, but because incomes are static, taxes are rising, and rises in the daily cost of living are reducing the surplus available to service the mortgage.
The point I was trying to make in my earlier article is that this will hit the value of land. The cost of building materials and builders' wages is fairly constant. But there is no reason why house prices should not be lower if builders pay less for building plots.
And a weak housing market is not the only thing pushing down the cost of land. Last week the tenpin bowling operator Essenden (AIM:ESS) said that many of its sites were 'over-rented' - meaning that the only thing preventing the bowling alleys from making money is the rent they are paying for the building. Essenden now wants the rents reduced and with the landlords having few - if any - alternative tenants, Essenden should have them over the barrel.
This type of thing is going on all over the country. House builders hate reducing asking prices - they would far rather throw in free carpets instead - and landlords hate reducing rent because this is an admission that their land values are too high. But the economic predicament of this country dictates that land values and house prices must come down.
I am sticking to shares in wealth creating companies. I suggest you do the same.
In the meantime I'll look forward to receiving the usual torrent of abuse....
This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
The hidden gems on Aim, London's junior marketFeatures Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the DogOpinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
-
Big gains from small caps
Features In an environment of middling inflation and low interest rates, small-cap stocks tend to beat big blue-chips. John Stepek explains why, and how to invest in them.
