By Ross Martin, Accountancy Director at Hive Business.
Since Phil and Kirsty appeared on our screens 15 years ago it’s become even more culturally mainstream to want to put spare cash into bricks and mortar, above all else. The aspiration is now so ubiquitous that it’s become something like the equivalent of going running; hardly anyone used to run, but now people do little else for exercise, nevermind the toll it takes on the joints. Similarly, an obsession with property takes its toll.
Dentists are vulnerable to this obsession, which is interesting given that they are a high earning bunch, and they have an array of options at their fingertips. Other business owners of comparable wealth tend to diversify their assets. Perhaps for dentists, being cautious and risk averse creatures on the whole, there’s comfort in knowing that everyone else is doing it, and how could everyone be wrong?
According to finance services group True Potential, UK equities delivered 1,433% growth between 1985 and 2015, if you steadily reinvested all your dividends. If you invested in shares but siphoned off the income, you would still have seen your money grow by 433%. You would have made 438% from putting it in a cash savings account and reinvesting the interest. Returns on bricks and mortar in the same period only reached 402%.
Diversifying is always good, as any IFA will tell you, and reinvesting dividends is a clever thing to do because it gives a huge boost to stock returns, building resilience into your portfolio through volatile periods. Putting all of your wealth in property, on the other hand, especially when the returns are comparatively poor, seems like a curious and ideologically driven choice. It certainly doesn’t build resilience into your wealth strategy. So why are dentists so fond of doing it?
It is of course true that UK homeowners have enjoyed a huge surge in house prices since the 1990s. This triggered the buy-to-let boom and created an army of amateur landlords looking to boost income at a time of low interest rates and make capital gains in the longer term. I suppose the thought of seeing a property you own go up in value by 20% in a year keeps people in hock to houses, and then there’s always that regular rent coming in, and a ready supply of tenants who are shut out of home ownership, what with wage stagnation and a shortage of affordable housing.
But do properties still go up by such astronomical amounts? No, not really. For the most part house prices are now regarded as unsustainably high. The Organisation for Economic Co-operation and Development (OECD) said recently that “buoyant” house prices in the UK were elevated relative to rents.
Meanwhile, 10 years on from 2008, it looks like a re-run of the great underwriting cock-up on houses is now brewing, courtesy of over-zealous lending on cars. Two thirds of new car buyers rent their vehicles through loans known as personal contract purchase (PCP) plans, and guess what happens if there’s an increase in interest rates or unemployment.
It’s hard to do a lot with houses in a recession apart from buy them, so the real question is, where do you want your wealth to reside when the next financial crash arrives? Do you want all your eggs in a single, overvalued basket, or would you like them spread around? If it’s the latter, I’d get going if I were you. And don’t forget to reinvest those dividends.
If you would like to discuss your options, get in touch on 01872 300232 or email hello@hivebusiness.co.uk.
