For many years, the housing market boomed and for those who got in early, they’ve made a killing. In a culture where an Englishman’s home is his castle, what for many years seemed a fool proof way of making money has made home ownership highly desirable. Not only do you have the comfort of owning a roof over your head under which to raise your family so that no landlord can spontaneously evict you (otherwise known as ‘security of tenure’), you’ve lined your pockets too. However, notwithstanding the bubble, housing was by its very nature, always a risky and at first instance, unattractive capital investment. It just so happened that for a period of time, the market kept going up and didn’t go down. So apart from the poor state of the current housing market, what is wrong with housing?

1. It’s expensive to increase your exposure to the housing market
Apart from attic or basement conversions which may or may not be possible on your home, it’s not really possible to improve your investment other than by saving and laying out large amounts of capital to buy another property. Contrast that with other investments. If you own X amount of gold and think it might be worth buying more, you buy an amount of gold equal to your then available capital; you don’t need to wait until you’ve saved thousands of pounds before increasing your investment.

2. Housing is an indivisible investment
Unlike other investment possibilities e.g. jewellery collections, you can’t sell off part of your investment should you wish to reduce your exposure to that market. Unless you have a particularly large back garden, or a big enough house to convert into flats, you can’t sell off your kitchen and keep the rest of your house as your investment. You have put all your eggs in one basket.

3. Housing has high maintenance costs
It’s not like a portfolio of shares gets subsidence or a leaky roof.

4. Housing is expensive
Seems obvious, but what this means is that it’s difficult to enter or expand into the market. If you only have £1000, you can’t enter into the housing market. You can however invest that £1000 in other ways and watch it grow.

5. Housing has high acquisition and disposal costs
You’ve got to pay solicitor fees, financing fees, conduct surveys etc before you buy a home. All this costs money. Other assets, maybe you pay a small fee to a broker, and that is it.

6. Housing doesn’t move
If something in your neighbourhood happens that could affect the value of your home, you can’t take your home out of that neighbourhood. Other assets are moveable; invest in wine and if there’s a problem where it is stored, move it.

7. Housing ownership isn’t anonymous
For good reasons, the Land Registry maintains a public record of who owns what property and what was paid for it. However, you may want no one to know what assets you have. Other investments are anonymous. No one has to know that you have that lost Da Vinci stashed in your back shed.

8. Housing sells slowly
If you want to realise your investment, whether because of a change in the market or your personal circumstances, it’s at best going to take days if not weeks to get at its cash value by selling or remortgaging and it’s not impossible that you need the cash now. Invest on the stock exchange, and it’s simply a phone call or an email.

9. Housing needs large amounts of debt to finance
The biggest drawback. Unless you have a very large amount of capital to invest, chances are you need to take on debt in the form of a mortgage. So to invest your £30,000 of savings in a home, you borrow £120,000 of debt, pay lots of interest on that (eating into your return, possibly exceeding it) and expose yourself to the associated risks of negative equity, interest rate fluctuations and repossessions. None of this is applicable to investing your £30,000 in long-term saving accounts or bonds.

Given the above and the bad state of the housing market, I and many of my friends and colleagues yet to get on the ladder are seriously questioning investing in housing. And Labour would be remiss not to question whether or not it should be developing policies that encourage people to invest all their hard-earned cash in housing, even if that is politically desirable. Some people will assume that as a party of government approves it, it must be the best investment out there. Last I heard, Labour was not FSA regulated. There are certainly benefits in encouraging awareness of other investment opportunities and possibly, as I suggested recently on LabourList, developing new ones.

However, although I don’t necessarily want to invest in housing, I do want to own my own home. I want security of tenure. So is it possible to get security of tenure without owning your home? Well, yes and no.

If you are a home owner, then unless you have bought a freehold in your home and have paid off your mortgage, you don’t really have security of tenure. Just as if you fail to pay rent to a landlord you may be evicted, if you fail to keep up your mortgage payments (even in interest only mortgages), your home may be repossessed.

What’s more, the fact is that many people who have a mortgage and own their own home are also in actual fact renting it. Instead of buying the freehold, they’ve bought a long term leasehold in the property, normally 99 or 125 years. They still see themselves as homeowners and that is because they are. Under English law, leaseholds of land are proprietary rights that can be enforced by the holder against third parties (you don’t need to ask a landlord to do it for you, you can do it yourself) and can be transferred to third parties. Yet leaseholders, despite owning their home, are still renting it. They probably pay a nominal rent under the terms of the lease. Yet notwithstanding that you’ve paid £400,000 plus mortgage interest, costs and home improvements on your home, at the end of the 99 years, the landlord comes along and takes it back from you or more likely, your children. That’s why secondary leaseholds of say 75 years left on the lease cost less. In short, such home buyers have taken the capital risk in the property and own their home but yet at the same time, rent it and have to eventually give it back to the landlord.

Realising this, I know of some people who have started looking for medium term leases (anywhere between five and 25 years) where they take some, or perhaps none, of the capital investment risk. Their view is that since the landlord gets the land back, the landlord can take the housing market exposure risk (and benefit). However because they have a leasehold interest they get the same (standard of) security of tenure as those holding long term leases but are able to invest their capital elsewhere. Problem is that in the UK, there is no domestic medium term leasing market (if one existed you probably would have thought about buying a home on it by now) – that’s only available to commercial properties. I know of one person who tried to lease a shop and was going to apply for planning permission to convert its use to domestic dwelling but that didn’t work out.

The fact that after some years the property has to be returned to the landlord is in reality of minimal concern to these individuals if they are not taking the capital risk. It’s still a pretty long period of time and most people go through two or three properties before settling anyway. Many first time buyers only intend to own their first home for a few years. Over time, their deposit that has been invested in other investments could have matured to provide the cash for whatever they want in later years, including but not limited to, buying their retirement home. In short, their position is analogous to someone who buys a house with a 25 year interest only mortgage except that (a) they don’t gain or lose if the value of the property goes up or down, (b) they don’t need a huge deposit to begin with and (c) at the end of 25 years, instead of coming up with hundreds of thousands of pounds to stay in their home, they just have to renegotiate a lease.

That’s the thinking of a few. It’s a large jump for most. Part of the reason why people are so preoccupied with property as being the main source of capital investment is due to an ignorance of other means of investing money and as argued above, this needs to be addressed. Can government promote a medium term real estate leasehold market? Maybe, but there needs to be a demand first.
Maybe the few pioneers I know of will start a demand for a new market, and maybe not. And maybe some people not wanting to own a home in the conventional sense will encourage others in the population to adjust their home ownership ambitions, and maybe not. Either way, I write this article simply to point out two things. One, that although as Richard says, it is politically expedient to promote home ownership, developing policies that prioritise one financial investment over others may not be the morally correct thing to do. Two, for most of the electorate security of tenure is more a perception than a reality and the same actual standard of security of tenure can be achieved without taking the risk on the housing market. Labour needs to start looking to encourage better ways for people to invest their cash. Labour also needs to find ways to provide security of tenure whilst avoiding that dreaded anti-aspirational word: renting!