As I’ve grown older, I’ve learned to keep my temper in public. I’ve also managed to control the bad habit when younger of ridiculing people when I thought they were being stupid. There are advantages to growing up.
But when it comes to housing, all bets are off. A few years ago I was speaking about the bond market at a conference in London. When it came to Q&A, a young man in his 20s stood up and asked me why anyone would invest in stocks these days, like the baby boomers once did. Wasn’t it obvious that stocks and bonds weren’t to be trusted? Younger people knew that the only safe investment was in real estate. How could I justify telling people to do anything other than buy a house?
He was well-spoken and obviously intelligent. My immediate reply was that that was the stupidest comment I’d heard in years; could he please confirm that he wasn’t being sarcastic? He did, and I proceeded to ridicule him. I shouldn’t have (sorry, out there, if you’re reading this). However, I still think it’s important to stamp out such nonsense. We all need a place to live, and a house can indeed be a great investment, but over the decades I’ve seen misbegotten love of property create far more pain than any stock market infatuation. And the British are particularly susceptible. It’s a disagreeable foible, much like the national obsession with the England football team (which many of my unfortunate colleagues know about after seeing me watch England play Germany in the Bloomberg newsroom).
Americans think I’m mad when I say they aren’t obsessed with housing the way the British are. Americans are, after all, obsessed by house prices. But it’s true. Brits have never taken to the stock market with anything like the same excitement. They tend not to think of themselves as budding entrepreneurs or Warren Buffetts. But they all seem to be convinced that they can make a killing in real estate.
To some extent, this is because of experience. Here is how houses have performed compared to stocks since 1975 in the U.S.:
Stocks have been a massively superior investment, as might be expected. Companies can grow with the economy in a way that houses cannot. Here is the same exercise for the U.K.:
In the U.K., housing and stocks have enjoyed much the same appreciation over the long term, but property has given a far less bumpy ride. And, of course, you can live in a house, but not in a share certificate. British home prices have also far outperformed those in the U.S. (almost as spectacularly as American stocks have beaten the blue chips of the U.K.) In part this is due to supply issues. Land is far easier to come by in the U.S. But there is also a particularly British presumption in favor or owning rather than renting, and a continuing predilection of politicians to curry favor by pumping up the market.
While there is a peculiar Britishness to the excitement over London home prices, the psychological problems with real estate are universal. For most of us, a house will be the biggest purchase we ever make. It’s important, and it’s public. People can see where we bought, and we will spend much of our lives there. We zero in on the price, because it has been the focus of vital negotiations. Most of us can remember the prices at which we bought and sold every house we've had. In the psychological jargon we “anchor” on these prices, and this leads to apparent massive gains. We tend not to think of the interest expense, or the repairs, or taxes, or all the other costs involved, and we don’t annualize returns and compare them to gains that might have been made elsewhere. Nobody provides a regular statement with the latest percentage return as they do for a pension or a portfolio. Bricks and mortar therefore tends to seem a far better and safer investment than it is.