Assertions of the mainstream:

"Property is the safest investment", "Property prices will always go up, at least in the longer term", and "Property is the most profitable investment".

Why these are all flaws:

These are dangerous assertions because they require three core competencies the vast majority of people don't have. Paradoxically, exactly those people who make these assertions. The competencies required are part of genuine financial competence, of financial literacy:

First, the understanding of the various investment types and asset types, and their underlying economics.
Second, the understanding of "safety" and "risk". What is risk?
Third, the understanding of yield and different yield types.

For more detail on these three core competencies go to Affluability.com.

Were property "the safest investment" then it would bear least risk. It does not. Property clearly bears more risk than some other investment types. Just think: For most people own property means that all their "wealth" is concentrated in one location, the property itself. Of course, this involves far higher risk than if you have well-diversified "wealth". Worse however, for most people it's not their own property anyway, but the property of the bank. They don't have "wealth" but debt.

Second, risk is a subset of yield. Long-term, the yield of property is suboptimal, and it will remain so for the future because of the underlying economics of property. The third downside of property is its limited convertibility. The fourth downside of property is its limited flexibility.

All four criteria mentioned are fundamental. The first two criteria relate to the essential sub-objectives of any financial protection, 1. safe and 2. quickest. See Objective on Affluability.com. The next two criteria relate to further sub-objectives you may have, and most people do have: At some point in time they want to exchange their property for a different investment, and they may be unable to do so (convertibility). Or they would like to retain their property but need or desire more flexibility because their life's circumstances have changed.

Now what about the clearly related assertions "Property prices will always go up, at least in the longer term" and "Property is the most profitable investment"? Why are these assertions flaws too?

Because the price of property will only go up when demand outstrips supply! This requires that:

People are interested in buying or renting your property, AND
These people experience scarcity of property with the respective characteristics and in the same area, AND
These people are able and willing to afford your property.

Note, the more people have their own property, the less interest is in your property, and hardly any scarcity.

You may now want to make the assertion: "Even if people already have their own property, they will continue to invest in buy-to-let property." Then I will repeat my prior sentence: The more people have their own property, the less interest is in your property, and hardly any scarcity.

You need to think it through: The more people have their own property, the less people need and want to rent property. The less people need and want to rent property, the lower the achievable rent. The lower the achievable rent, the lower the yield for a buy-to-let investor. The lower the yield for a buy-to-let investor, the fewer people want to be a buy-to-let investor. The fewer people want to be a buy-to-let investor, the fewer potential buyers for your buy-to-let property. The fewer potential buyers for your buy-to-let property, the lower the achievable price. Then you may still find a buyer, but not at the price you desire.

When supply outstrips demand, the price will no longer go up but will go down. For this very reason, in many countries property prices in general have no longer gone up at all over the past decades.

You may now want to retreat further to the assertion: "But not in my area. Here, property prices have gone through the roof in the past, and I am convinced they will continue to do so in the future."

Then you urgently need to read more on Affluability.com: The more prices have gone up in the past, the less likely that they will continue to go up in the future! The next slump is always certain. What is not clear is its beginning and its end.

An investment in property is a one-off spending. In order to exit this investment at a profit, the price at the time of sale must be above the price at the time of purchase. If you suffer a slump in between, you may have to wait beyond your death before you can sell at a profit. But can you then?

Like millions of other people, you may believe: "I don't need to sit out a slump, I see it coming before and sell in good time." Yes, you may be so special to be able to do that. But also, you clearly rely on hope. Financial protection should never rely on hope, but on financial competence.

© D. Bennett 2000 - 2010. All rights reserved. See http://Affluability.com.

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About the Author:
Private Equity Investment Strategist by choice.Qualified Private Banker, MBA, MSc Economics, Qualified Accountant IFRS by education. See http://Affluability.com
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