Buying a house can be great as it gives you leverage but if it’s not the right time for you, then it can be bad as it gives you leverage!

My point was not to think of buying a house as automatically the best thing to do.

I’d compare endowment mortgages to the returns you could get if you respond to a Nigerian fraudsters £20MILLION OPPORTUNITY!

Okay, I exaggerate a bit, but the financial services industry has found 1,000 ways to extract money out of useful investments and make them work for them, not their customers.

They do it all the time with shares — endowments were their move on bricks and mortar!

@Rightly Knightly

“The FTSE has risen by approx 577% since 1984, whereas the UK housing marketing has only risen 504%.”

This is not a useful comparison at all. What if you put 10% down on the house? Your ROI may be nine times the return from the FTSE. Of course there are other factors such as taxes and maintenance. But, purchasing a home, if done properly, can be a great investment.

Thanks for the post!

Conrad

http://howtomanagemoneytips.com/

@Rightly Knightly -let’s play numberwang!

Only joking.

Firstly, we live in unusual times so at the moment its not that difficult to find a cheap place to rent putting into question your assumption that renting costs more per month for the same lifestyle as person A (in a house).

“As long as Person A didn’t buy a house that needed extensive work”

This ignores basic psychology -when you own your own house it takes tremendous discipline not to spend money improving it and making it your own -this is not wrong, in fact you would end up with a lovely house. But it would cost you more than you might think if you factor in what you’re missing in potential investment returns (again not that this is wrong, but just so you’re aware).

Ultimately I agree with you that property is best over the long term because you eventually build equity in a house giving your security and freedom. But property only really gives a good return over the long term so I’m questioning if it’s a good move considering most 20 somethings (my readership) will not be staying in the same house more than a handful of years.

@Jon: very true. You’re right about the topsu[percentile complicating things. To address your other point, the supposed appeal of 100% mortgages is that you can keep more of your wealth in the stock market (or consumer goods!) instead of your pennies being ‘stuck in house equity’ (quite risky but heady wreck-less optimism is fun to watch )

@Sam, this is a brilliant comment thanks -I hadn’t thought about it that way.

Owning your own home means you’ll take more pride in everything and have motivation to make your home energy efficient. That said owning your own property may also mean you could over-spend (as explained in my response to Rightly Knightly above).
Long term though, you’re right: owning your home and making it energy efficient saves you more money than you would expect and is often worth the up-front cost…but would you expect to live in a house long enough to recoup the investments? I imagine most 20 somethings won’t.

@Sean. Brilliant question about endowments. Let me know if I am vindicated when I’m done OK?

Firstly for readers who don’t know what Sean is saying:

There are two basic types of mortgage. The first is a repayment mortgage, where you make one monthly payment to the lender which is part interest and part repayment of the original capital.

Basics of endowments

Then there are interest-only mortgages, where your monthly payment to the lender is just the interest on the original loan and the mortgage debt remains unchanged. You then make separate payments into an investment scheme (such as an endowment), with the idea being that at the end of the mortgage term this investment will have grown sufficiently to repay the mortgage.

Interest-only endowment mortgages were very popular in the 1980s and 1990s and were often chosen in the belief that the endowment would end up being large enough to clear the mortgage and still leave a tidy sum of money left over as a bonus.

Judging from some of my writings about market returns Sean is forgiven in thinking I may be a proponent of this view: i.e. why put money into property when you can invest it?

However… here’s why endowments failed and why the Magical Penny strategy I’ve been arguing is different:

“Endowments” as a product were aggressively marketed to everyone, with huge fees paid to ‘advisors’ on commission. This money didn’t come from no-where- it came from the payments that endowment policy holders paid. This ate into the returns.
You don’t know this yet but Magical Penny investment philosophy specifically seeks to avoids such fees.

Stocks and shares can be “solid, dependable, returnable investment” and over the long term history it has been shown they are. But towards the end of any investment horizon they require careful management of risk (i.e. getting out of them gradually in case the market dips when you need them.)
However, for endowment products the investments were often ‘black-box’ products that people didn’t understand -and they were not adjusted for risk as the mortgage term approached- leaving many with shortfalls when the market went through one of its volatile periods in the early 90s.

These days you can have much more control over your investments and have an opportunity to develop a greater understanding. However that is not to say that when you do eventually get a house that you should not pay it off:it really makes sense to build equity in a house because if you do need to move for any reason (family/job etc) the equity gives you flexibility and security (and a warm fuzzy feeling ). If you had all your funds in the market instead of equity you might get ‘stuck’ if you are unhappy with current stock valuations when you needed to move or need to pay on the mortgage for any reason.

-end-

There you go Sean, practically a whole blog post in itself but I hope I’ve made a few points a bit clearer.

I don’t have all the answers though so appreciate the comments -it gets everyone thinking (rather than sticking to preconceived notions of ways to get property or equity riches). Phew…