'Property is a better bet' than a pension says Bank of England economist – that was the headline in The Guardian (and similar elsewhere) just a few days ago.
Andy Haldane, who is the Bank of England’s Chief Economist, no less, also then confessed to thinking pensions are overly complicated. Quite something in itself, but what was most interesting was that he had concluded nobody understood them… not even the financial advisers he’d spoken to. And in his opinion, therefore, property was almost certainly better than a pension…
Now on the face of it, you’d think this is something of which to take note when mooted by a person who was named one of the 100 most influential people in the world by Time magazine in 2014. But how much stock should we take in his words?
Some background information…
First things first, it’s worth you being aware that Mr Haldane is already in line for a pension of more than £80k a year. He currently earns a salary of £182,000pa and this enables him to not have to worry about money. However, equally so, he was quite adamant that he did not consider himself to be wealthy.
Mr Haldane also admitted that he doesn't have a credit card, which will give you some sort of idea about his view of debt. His spending is on debit cards. That might suggest he's a somewhat risk averve person, perhaps, which in turn might suggest why he has a leaning towards property as a future proofing investment. Lets consider this briefly...
What does property have to offer to the risk averse individual?
· Security of capital? – Very likely, yes, for although the value of property can fall as well as increase, the long term appreciating nature of property – an aspect to which Mr Haldane refers – means that as an asset it offers far more security than say the volatility of the stock market.
· There are both revenue and capital returns? – Not only does the value of property tend to increase over the long term, but there is an opportunity for monthly/annual revenue as well through rental income etc.
· Modest borrowing can be leveraged to maximise returns? – It is possible to borrow (mortgage) a percentage of the value, whilst paying the rest yourself. The returns you make are then calculated only on your actual investment, minus mortgage fees and interest costs etc.
· Better returns than on cash deposits? – With interest rates as low as they are, and predicted to remain low for quite some time, your money will be doing little for you if it’s just sitting in a bank account. Putting it to work via a property investment is likely to present you with a much better return in the long run.
What’s the rationale for this?
It’s a simple balance of supply against demand really. The country is not building as many houses as are supposedly needed, and thus demand is outstripping supply. It’s pretty basic economics, when put like that, and it’s what virtually a whole generation has ever known. You could say that, for some, increasing house prices have almost become a natural law. And as far as Andy Haldane is concerned, this trend isn’t going to change any time soon.