6.2.5 Housing as an investment

Throughout much of the 2000s, property was considered a serious alternative to other kinds of investment. Driven by the liberalised financial services sector, which made mortgages easy to obtain, and a boom in house prices, property was seen as a one-way bet. When property prices began to decline in 2008, investing in property for capital gain began to look like a more uncertain strategy.

This is not to say that you should overlook the investment in your own home. It’s easier to raise finance on the ‘primary residence’ than on second homes; there’s only one set of interest costs to worry about and there’s normally no liability for Capital Gains Tax on any profit made. The objective with your home (apart from having somewhere to live) would be to increase its capital value and so the equity in it. There are several ways in which that can happen over and above any general rise in property prices.

Homes can be bought in an ‘up and coming’ area where property prices will rise more than the average; they could be bought at below the ‘true’ market value; or someone can add value to a property by finding, for instance, a rundown home suitable for refurbishment and, when completed, sell at a profit over and above the total cost of the purchase, interest and refurbishment.

The video, from October 2013, explores the way in which the purchase of property as an investment has continued to be popular and to have a significant impact on property prices, particularly in areas like London.

Download this video clip.Video player: ou_futurelearn_money_vid_1227.mp4

Show transcript|Hide transcript

Transcript

ELEANOR GARNIER:

This is luxury living. High ceilings, a touch of marble, plumped to perfection. London properties like this are a place for the world's millionaires to move their money and make more. A safe investment in a turbulent economic world and it's turning property in our capital, into a global reserve currency.

JOHN WALTERS:

So we've just bought this house on Glebe Place in Chelsea onto the market at 6.75 million pounds. Had we been marketing property a year ago we probably would have been asking closer to 6 million, perhaps 6.25 million pounds. The reason for that is that we've seen prices growing in the area by around 7%.

ELEANOR GARNIER:

It's a familiar story across the capital, in all areas of the market. Latest figures from the office for national statistics show that in the year to August, house prices in the capital shot up by 8.7%. One agency's recently reported that asking prices went up by more than 10% in a month. It's fuelling fears of a housing bubble and making London increasingly unaffordable for many.

MILES SHIPSIDE:

High level of international interest; some agents report over 50% of purchases coming from overseas, with their affordability being greater than the domestic buyer, that's obviously pushing up prices. So the choice for the domestic buyer is either move further out or really stretch their levels of borrowing, to levels that really aren't sustainable.

ELEANOR GARNIER:

It's not just the influence of foreign buyers and the influx of immigrants that's sucking up supply - there are many factors. Our strong cultural desire to own homes rather than rent, more people living alone and the help to buy scheme are all sighted. Close to the capital, in the South East, the ripple effect is being felt. Elsewhere, across England, Wales and Northern Ireland; house prices are rising, albeit far more slowly. In Scotland, they are falling. London's mayor Boris Johnson welcomes overseas investment. He believes the solution to high 1prices and short supply is to build more, but there's pressure on politicians for radical steps to help average income earners.

DUNCAN STOTT:

We need restrictions on foreign capital coming in, as they have in Singapore, Hong Kong, Switzerland, many other countries, and we need to make sure that council tax is much more applicable compared to how much house prices actually are, because a mansion in Kensington and Chelsea paying less council tax than a ordinary four bed house in Stoke-Upon-Trent, that's just not acceptable.

ELEANOR GARNIER:

New homes are springing up across the capital's skyline. The concern though, is they're serving the appetite of rich investors rather than helping to meet the drastic shortage of affordable housing.

End transcript

Download

 

Another way to make money from a home is to rent out a spare room, effectively using the home as an income-producing asset. Some people carry these ideas substantially further and rent out several rooms, or regularly buy, develop and then sell individual properties. Doing either would move into the realms of trading, and as a result both Income Tax ‘Rent-a-Room’ relief and Capital Gains Tax exemptions would be lost.