Do homeowners really see their homes as an investment?


April 25, 2012

Sean Oldfield is the chief executive officer at Castle Trust

There’s long been a debate in our country – especially among younger people – about whether it is better to rent or buy a home.

Those who aspire to be homeowners are usually swayed by the notion that their home is an investment – that money spent on rent is money lost.

Yet research we have just undertaken at Castle Trust flies in the face of this assumption and suggests that people who opt for ownership are often prepared to sell their home at a loss. Surely anyone looking for a return on their investment would hold onto any asset until its value rose again?

Let’s look at the figures. Our researchers looked at Land Registry data on all homes that were bought in the UK since 2006 and sold in 2010.

Would homeowners sit tight as prices were falling and wait until they could recoup their outlay? The chart below shows what we found.


Two things are evident from the chart. First, while the national Halifax House Price Index fell 7% between the middle of 2006 and the middle of 2010, the prices achieved by those who bought and sold over that period varied enormously. Second, more homeowners sold their homes for the same price as they had paid for them than for any other price, confirming our belief that sellers really don’t like to make a loss, if possible.

But, while half of sellers managed to make at least some profit on their sale, almost 40% were prepared to take a loss, rather than stay where they were.

We can expect to see similar numbers for 2011 and it is reasonable to assume that there are still a number of homeowners holding off selling who may eventually sell at a loss anyway; so they will have stayed put when they originally wanted to move AND then made a loss on their home. We are unlikely to see a fall in the number of home owners selling at a loss until headline prices are rising strongly.

So what are we to make of this? Could selling at a loss sometimes make financial sense?

There is certainly an argument that there is no problem with selling at a loss because you will also be able to buy your next home for less. However, this argument depends on two big assumptions also being true:

·         you still have a large enough deposit to put down on your next home, and

·         the house you want to buy has moved down as much as the house you are selling, which will not necessarily be the case.

As the Land Registry figures show, more people than you might expect are prepared to take a loss rather than stay put until they are in profit again.

Could it be that many homeowners accept that their home is not an investment in the traditional sense, but an asset that provides a service and comes with a cost, including paying the mortgage and general maintenance costs?

If this is the case, and almost half of homeowners are prepared to take a loss on their home, rather than sit tight when they need to move, I’d argue there should be a common way to ‘insure’ against some of that loss so people can protect themselves against the chances of losing their deposit.

I believe that ‘insurance’ could come in the form of shared equity deals. By selling some of the equity in their home to those who want greater exposure to housing, people who are prepared to take a loss on their home could minimise that loss.

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