THE PRUDENT INVESTOR: Why buying a house in my mid-20s was the best investment I ever made
When it comes to property, I’ve been a nester rather than investor. I’ve never bought a holiday home and I ignored the buy-to-let boom.
I get irritated by those who in one breath brag about their portfolio and in the next bemoan the fact their children can’t afford to get on the housing ladder. Do they fail to see the contradiction?
Despite this, I still feel that buying a home in my mid-20s was the best investment I ever made. I took advice to stretch myself as far as I could on the mortgage, which in the Eighties made sense because wage inflation soon reduced the pain of repayments.
Tony Hazell says that buying a home in his mid-20s was the best investment he ever made
There’s a technical reason why property can be such a good investment — gearing. This is the growth you make from borrowing money. Say you buy a home for £200,000, contributing a £40,000 deposit and borrowing £160,000.
If the house price rises by 20 per cent in four years it will be worth £240,000, so you will have made £40,000. As your investment was £40,000 you have doubled your money in a short period. If you put £40,000 in an investment that grew by 5 per cent a year you’d make about £8,600. Of course, you’ve got to make the mortgage payments, which on a £160,000 25-year repayment deal at 2.5 per cent would be £718 per month.
But on your own home this can be less than paying rent and, with buy-to-let, the rental income can cover this. For the past 25 years buying a home in the UK has been more or less a one-way bet, with prices rising almost every year.
This has coincided with the buy-to-let boom, so those borrowing large sums were almost guaranteed big capital gains as well as rental income.
But there have been times when prices fell, such as in 2008/09, and in the early Nineties prices drifted downwards for four years. In this case gearing works against you. Take that £200,000 home. If it fell by 10 per cent to £180,000 then the £20,000 loss would equate to half your deposit.
In the Nineties, this led to a situation where some borrowers owed more on their mortgage than their house was worth — so-called negative equity.
However, since the end of 1995 the average house price across the UK has increased by 318 per cent from £50,930 to £212,694 according to Nationwide Building Society. This has helped to fuel cries of so-called generational inequality. However, those of us who bought in the Eighties remember mortgage rates peaking above 15 per cent.
With those rates that £718-a-month repayment would have bought a mortgage of less than £60,000. The average wage was also roughly half what it is now, so don’t worry millennials — we have shared your pain.