Who should houses be for?

Two views one often reads about houses are that they should be:

1. An investment item: they are the largest store of wealth for most families and so people benefit if they increase in price like an investment.
2. Affordable to first time buyers: you should be able to get onto the property ladder at an age younger than 30-35 and you should not have to live in a high rent environment until you are able to do this

These two are often spoken about but often not at the same time. This seems like it would have the potential to create a doublethink type situation where we believe the two goals are both achievable as we only think of one at any given time. This post will be a very rudimentary showing of the trouble with these two view coexisting.

Let’s suppose you want a house to be an investment item. It seems likely then that you also want it to increase in value at a similar rate to other investment items you could buy. It is of course true that when many people buy a house the investment characteristic is a useful addition but not the primary reason, after all you still actually need somewhere to live. However, let’s assume that you want your house to compare comparably to other investment choices. The S&P 500 20 year historical return has been around 6.3%, and so this is the number we will take for target investment income per year. Meanwhile if we wanted houses to stay as affordable for first time buyers then they could only increase at the pace of wage growth, which I will proxy with inflation. I know this is not the best proxy but it captures the essence of houses staying as the same expenditure in purchasing power. As I used the S&P I will look at USA 20 year average inflation which has been 2.2%. Now without further ado how would the price of a house initially costing £250,000 change over 30 years under these two targets:

As we can see the two different targets give widely differing outcomes with the investment tracking house ending up being worth 3.4 times more. I am not trying to put forward a particular view and I know that there will be some areas where houses do track inflation more than other areas, however, I was surprised when I realised how divergent the outcomes of these two view points would be and I thought that others might be too. Again, I am not trying to say who houses should be for, although it does seem like if one expects 6.3% a year then within a generation houses will become even more the purview of the richer groups, but I wanted to make something that could act as a reference point in conversations about these differing views on house pricing.