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    Property is a riskier investment than we think

    10 June 2020

    Quote of the week comes from a Mrs Emma Tullett, whose bungalow – appropriately called Cliffhanger – was destroyed in a landslip at Eastchurch on the Isle of Sheppey. Having lost the £195,000 she paid for the property two years ago, she told reporters that she was determined not to let the same happen again. She was going to buy a plot of land and build a house, and this time it would have absolutely no chance of falling into the sea.  How come?    “We’d make sure we weren’t above sea level.   It would be firmly on the floor.”

    You can’t fault her logic. But all the same I think I detect a possible flaw in her plan – especially with sea levels rising by around 3 mm a year. Mrs Tullett’s house wasn’t the only one to fall foul of coastal erosion in the past week: in the northern Norwegian town of Alta 10 houses fell into the sea in an enormous landslip.   Fortunately, no-one was injured in either that of the Isle of Sheppey incident.

    Investing in the stock market, as investors have discovered over the past few months if they didn’t know already, has many pains. But is property necessarily a more secure investment? Many seem to think so. In the last crash it was subprime mortgage loans which precipitated the whole disaster. Yet in 2009 property prices recovered quickly in many areas as investors figured that their money was probably at least as safe there as stuffed in a savings account with one of these dodgy banks.    As for shares, it is easy to come to the conclusion that while they are only really exist as blips on a screen a house will still be a house whatever happens to the property market. You can feel it, touch it, see it – and in many cases smell it, too, at least if it has mould and rising damp.

    Therein lies the problem: while houses and flats are unquestionably physical assets, they are not quite as robust as it is tempting to believe. Like your Ford Mondeo, your semi in Carshalton is steadily decaying, albeit hopefully at a slower rate.     Unless you invest in it, it will eventually crumble – and that could just happen sooner rather than later if it has some hidden structural issues. Even then, it is tempting to think, you will still have the land – although that could always fall into the sea, be washed away by a river or become unusable, say, through a nuclear accident, political coup or whatever. As for flats, most of which in England are leasehold, you have to ask yourself what you are really buying: not a property but a long rental contract which will eventually expire, leaving behind no value.

    It is unlikely that a property’s value will collapse to nothing in the near future, of course: away from crumbling coasts and places with a history of sinkholes your investment is pretty safe. You are more likely to find one of your shares doing a Carillion. But then how many suckers had as much invested in Carillion as they have in their home or in any one of their investment properties? I count myself as a sucker as I was one of those who suffered a complete wipe-out with Carillion. But then my holding was never worth more than my front door (whose value itself collapsed to zero around about the same time as it disintegrated with wet rot).

    That is the real advantage of the stock market and the disadvantage of the property market: it is easy to spread your risk with the former and very difficult with the latter, unless you have many millions to expend on a well-diversified property portfolio. Who cares if one of their shares metaphorically slides in the sea if they have others which are doing well?   Well, actually I did care when Carillion went under because it made me feel a fool.   But when I looked at my portfolio it wasn’t easy to discern the damage. It would have been a very different matter had I woken up to find my house halfway down a cliff.