Probably don’t invest in property

Subtitle: unless you want to live in it!

My impression is that, when Millennials want to invest, they use index funds (or ETFs), rather than individual stocks or property. The general wisdom that you can’t beat the market seems to have sunk in quite firmly. And owning property other than their home seems to be mostly restricted to some kind of hustle culture TikTok scams, plus people who inherited lots of it. But Baby Boomers (it seems to me) are more familiar with old-fashioned stocks and houses.

Everyone knows stock-picking is silly, so I’m not going to talk about that. But I think property is more complicated, and more deeply embedded as the hallmark of a safe and reliable investment. So I wrote this so that people can share it with the Boomers in their life as an antidote to the never-ending urge to accumulate more m2.

Note: Separate from all of this, I think treating housing mostly as an asset class has all sorts of negative consequences for society (increased cost of living), and for productivity (decreased investment in productive assets). But I’m not going to bang on about that (too much) today.

So, why not property?

# Concentration

A key idea with investing is that when you concentrate stuff more, or take on more risk, you should know why and you should expect to be compensated for doing so with increased expected returns. Short of special ideas/knowledge about increased returns, you should aim to diversify as much as possible to decrease your risk exposure to specific sectors, regions and asset classes. For more on this (and it really is worth understanding), you should read this excellent book review of The Laws of Trading.

This risk concentration applies not only to your liquid investments, but to your home (if you own it) and job. Here’s a made-up example: a wealthy 40-something couple living in London[1] , with their three main “assets”, showing the value and risk concentration of each:

Even with their liquid assets invested in a global ETF, they’re still 2/3rds concentrated in London, UK! Their salaries and home value are intrinsically tied up in how well the London and UK economies are doing. And if they went and invested that last £1M in a rental property somewhere in London, they would be 100% concentrated in one city. They could also invest in property somewhere else, but they will still be super-concentrated in the property sector. Without a good reason to think London or property is about to boom, they would not feel appropriately compensated for taking on that extreme concentration in risk.

# Mortgages

One of the best reasons to favour property over other investments is that lenders will give you money to do so, which is much harder with equities. In some countries the state even subsidises these loans! For a deeper dive, this great blog post (albeit US-focused) talks about the idea that owning property is a bet on local labour markets, and the weird impacts of 30-year subsidised mortgages.

If you can get a low-rate, government subsidised fixed 30-year mortgage, then that’s certainly an argument in favour of property (although not a sufficient one, keep reading). But if you can’t get a mortgage, or the rate is high, then this reason evaporates. This might be because you aren’t in the US, or you’re trying to buy property in a foreign country, or something else.

# Hassle

Owning a property is much more effort than owning an ETF, and comes with significant costs. I would guess that many buy-to-rent owners significantly underestimate their costs and so don’t have an accurate number for what the returns are on their property (never mind the fact that it’s not liquid, so until you sell you don’t know what the total gain was).

There’s also general upkeep and admin and council taxes and broken internet and leaks and mould to deal with. But this is also one of the potential advantages of property: your own labour. You can spend two months cleaning and painting and decorating and buying furniture, which adds value to the property. And then again between each rental and when stuff is broken (in England, probably often). If that isn’t appealing, or you don’t have time for it (or you’re an aging Boomer), probably don’t own a rental property.

Because the alternative is to pay a company to do it. So at this point, you own a property with no special knowledge of its potential upside (unless you’re a property developer, this is probably the case). You pay others to maintain it, with no special knowledge of their quality, pay others to manage and market it etc. At the end of the day, you may as well own a property ETF, but you’d still be overly concentrated (again, unless you know something I don’t, which you might).

# Opinions

Everything until here was agnostic on whether property (in general or in any particular geography) has performed well, or can be expected to perform well in the future. But I think there are some structural reasons this is unlikely, although you can probably find loads of other opinions going one way or the other.

Firstly, interest rates have been slowly falling over the last 10,000 years, from probably 1000% (if you want to borrow my cow, you better give me it’s exact worth in chickens right now) to around 0% (here’s some cash please don’t bother me about it). This has pushed up house prices[4] . But now it’s done.

Second, limits to affordability. Currently the average house in the UK costs around 9x average earnings (i.e. the average income is £34k, the average house is £300k). This can’t go up forever: even if all houses are bought by international investors, they still need to rent them to people in the UK who earn UK salaries. If their salaries don’t increase, eventually their rent will be 100% of their income and either rents (and therefore house prices) will have to decrease, or there will be riots. I don’t know what the number is where this downward pressure intensifies, but we can look at some numbers: annual income growth in the UK for the last 20 years has been 3-5%. Each year that property prices grow above income growth, that 9x multiple increases. If you assume property beats income by 2% for 30 years (which you as a property investor basically want!), then in 30 years that multiplier will be 20x. Probably some time before that some kind of downward pressure (regulation) will come in.

Third, structural stuff: population growth is slowing. House prices go up because number of houses built has grown more slowly than number of people born. Now the number of people being born is slowing (but in the UK we obviously also import a lot of people). Also YIMBYism is gaining acceptance, so maybe the balance of those two lines will change.

For more opinions and a pile of charts, Why I don’t invest in real estate is a fun read. You should read the pessimistic take on property and decide how and why you disagree with it before making any big decisions!


[1] go back This is not me. I’m only 33, and I don’t live in London.

[2] go back The Jobs figure is a very very rough NPV (net present value) of the next 10 years of their income with a high-ish discount rate. It assumes they have some flexibility of what industry they’re in, so they don’t need to consider the NPV over their entire career.

[3] go back You might have noticed that their investment portion is 100% equities, which some people think of as being risky. But only on short timelines, which is an orthogonal consideration to their concentration. If your horizon is 20+ years, pure equities makes sense. As our 40-something approach retirement, they need to consider this risk and mix in some bonds and cash to smooth out year-to-year fluctuations so they can keep withdrawing and funding their lifestyle.

[4] go back Falling interest rates also push up equity prices, but equity prices are also pushed up by being productive, whereas houses are not productive.