In an opinion-piece in The Telegraph, economist David Starkie questions whether we have the wrong idea about property investment. “To see why, let us dig deeper into the way the return on housing is commonly measured, which means looking a little closer at the much touted house price indices.”

The Backdrop: The author found old invoices for repairs and renovations of a home they used to own. The house was old and required maintenance, but also had some upgrades. This sparked a thought: is property really that great of an investment when you account for all the money spent on it?

The Big Question: We often hear property is a great investment. However, when considering all the money spent on improvements and upgrades, is it as good as we think?

How We Measure Property Value: There are several house price indices, like the ones by Nationwide Building Society, Halifax, and the Office for National Statistics (ONS). They track house prices using various methods:

• Nationwide and Halifax rely on mortgage data.
• ONS includes properties bought with cash.
• The data is adjusted for the type of property, its age, location, and other factors to give an accurate idea of average prices.

The Problem: These indices might not be comparing like-for-like properties because homes are constantly improved and upgraded. If one house has been upgraded and another hasn’t, but they’re both sold for the same price, the index doesn’t account for the money spent on the upgraded house.

Home Improvements: People are spending billions on home improvements. However, it’s tough to differentiate between maintenance (just keeping the house as it is) and genuine improvements (that add value).

Planning Permissions Indicate Upgrades: The Valuation Office keeps track of homes that have received planning permissions for improvements. As of the end of 2018, over 6% of properties in England and Wales had an “improvement indicator”. But, only about 20% of these homes were improved enough to increase their tax band.

What About Smaller Upgrades?: Many homeowners make small but significant upgrades that don’t require permissions, such as garden improvements or loft conversions. These are often overlooked but can cost a lot.

The Current Shortfall: Right now, we don’t have a clear idea of how much homeowners are spending on improving their homes. As a result, house price indices might be giving a skewed idea of how good an investment property really is.

The Ideal Solution: We need an index that considers the constant quality of a property. This index should consider both the sale price and the investment made in upgrades. Currently, we lack such a comprehensive measure.

Conclusion: While property is often seen as a good investment, it’s essential to account for all the money spent on improvements. There’s a call for more research in this area by institutions like the ONS or Bank of England to get a clearer picture.

Basically, just like considering the costs of feeding and maintaining a pet along with its purchase price, property investments too have hidden costs that need to be accounted for in order to truly understand their value.