Who would want to buy a house in the UK at the moment? Look at the prices and you'd think the answer would be absolutely nobody. In London the price-to-income ratio is at a record high 15.7 times, according to Danny Dorling, a professor at the University of Oxford.
It's the same in Oxford itself, where Professor Dorling tells us average house prices are now just over 16 times the average income. The ratio is over ten in Cambridge, Brighton and Reading.
Across the country it averages well above five times (how much above depends on the index you use). And even the OECD noted this week that UK house prices are overvalued to the extent that "short-term risks are emerging in the housing market".
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Popular wisdom has it that this doesn't matter, because the UK has the kind of supply shortage that will keep prices permanently high. I'm not convinced about this. It might be that we don't have a supply problem, we have a floor space usage problem. The latest English Housing Survey shows that the number of homes with two or more spare bedrooms has hit 8.1 million. Half of owner occupiers are now technically "under-occupying" their properties.
These homes tend to be lived in by the retired the ones who haven't yet downsized. As our ageing population sells up, will we still have a housing shortage? Something to think about.
Still, none of this means that all property is overvalued (in much of the north it isn't) and it isn't exactly putting people off either. Ask anyone where they want to invest and the answer is almost always property. If they don't own a home, they want to own one; if they already own one, they want another as an investment.
But buy-to-let investing the obvious way forward is a nightmare of administration. Think voids, demanding tenants and broken boilers. It isn't easy to get into: you'll need a deposit of around 25% to get a loan in the first place. It's risky, too: very few of us are rich enough to have properly diversified portfolios, while piling hundreds of thousands of pounds of partly borrowed capital into just one asset.
This is where property crowdfunding comes in. It takes the disruptive force of peer-to-peer finance, merges it with buy-to-let and promises access to the housing market of your dreams without any of the hassle.
There are a variety of platforms on the go PropertyMoose, The House Crowd and Property Partner, for example. But they all operate with a similar premise. They offer properties online. You sign up to buy one with a group of other people inside a company specifically created for the purpose and you are an instant buy-to-let landlord.
I love the idea of this how wonderful to be able to own small bits of residential properties across the UK without any of the palaver that usually comes with ownership. But it isn't without its problems. The first is control. You have no control over who the tenants are, what the rent is, how the property is managed, or, for that matter, how the costs are calculated.
What's more, most crowdfunding firms reserve the right to borrow against the property should the revenues from the house not cover the costs (a pretty common situation in buy-to-let). That means you may have to watch from a distance as the net value of your stake falls rather than rises.
You also take a risk with the platform. As long as it is honest (there is serious scope for scamming here), you should still own your share of a property even if the platform folds. But imagine the admin around trying to get your money out alongside hundreds of other cross investors: it could be, says a report from the Council of Mortgage Lenders, "difficult, time consuming, complicated and risky".
The second is cost. If someone else is doing all the investing work, they clearly need paying, but nonetheless crowdfunding fees do seem high. The House Crowd will charge you 5% up front and a profit share for their management company from the rent and gains of "around 25%".
Property Moose charges you 5% up front as a finders' fee and then 15% of the yield as well as 15% of any final capital gain. All the usual costs are going to be in there legal costs, advertising and so on. But it's still a bit like an old-fashioned hedge fund.
All these things pale next to the real problem liquidity. It takes an average of about three months to sell a house in the UK. You can speed that up if you own a whole house: slash a price far and fast enough and anything sells. But you can't do that with a crowdfunded house. You have to work inside the parameters set by the company (a vote every five years, for example). So if you need out in a hurry all you can do is hope there is a secondary market a way to find people who want to buy your share.
Even if there is, what price will they pay? The problem here is that without actually selling a house, you don't know what it is worth. 70%of houses don't go for their asking price (the number someone once thought it was worth); everyone knows that the price paid for a house is as much a function of luck (right buyer, right time) than anything else.
Even if you could establish the right price for the house on every given day, it doesn't mean your stake is worth your percentage of that. A discount will be attached for the fact that the capital will remain tied up in the house until the group sells. And if prices are falling when you try and sell, that discount will also reflect the expectation that when the capital is released there won't be so much of it left. In that sense, crowdfunding doesn't so much cut your liquidity risk as raise it.
Property crowdfunding is very tempting. There are regulated and credible players in the sector. To those looking to take advantage of the new pension freedoms it will seem like an easy win.
The same goes for those priced out of the areas where they'd like to buy to live, or for that matter, for anyone who is prepared to take high risks to get income above and beyond that offered by our miserable banks. But don't think that it cuts the risk of investing in property. It doesn't.
This article was first published in the Financial Times.
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