Jan 14, 2018

Soon enough there will be no place like a second home

Money tends to make people go mad. One of the mad things people who have money do is buy second homes. This purchase can make emotional sense, but it very rarely makes economic sense. At heart, owning a holiday home is a romantic decision, unlike owning a principal private residence.

After all, we need somewhere to live, and investing in a property is usually a sound financial move — but having two rarely pays. Most owners use second homes a fraction of the time, but meanwhile they have to pay all the maintenance, tax, insurance and service charges.

Millions of second homes all over the world sit vacant for most of the year, while costing money to clean and repair. Indeed, they can become a burden and a source of guilt, obliging the owners always to go on holiday to the same place, even if they are bored with it.

Of course, a second home is seen as a vital status symbol and, indeed, almost a social necessity among a certain class — as important as sending your children to the right private school or going skiing every winter.

The big choice is whether to have a weekend home in Britain or a holiday home abroad — or possibly both. About 3.5% of the population has a second home in the UK, according to the Office for National Statistics, and 1.5% owns a home overseas.

The Resolution Foundation reports that there has been a 30% increase in multiple-home ownership over the past 15 years.

Not all second properties are holiday homes but most are, especially abroad. However, the buy-to-let boom is over due to tax increases, with many people finding that being a residential landlord is a lot of work for little income. In the medium term, I suspect holiday homes will prove a poor investment. Historically, some people have made money owning Swiss chalets and Greek hideaways, but buyers of such properties are fast disappearing. Millennials prefer spending money on experiences rather than possessions, which is why they are shunning buying cars, for example.

I think they are not going to buy second homes as their parents’ generation did; they love to travel but want to explore and are much more adventurous in their holiday ambitions. I don’t think they enjoy going to the same destination every year, when, thanks to the digital revolution, low-cost airlines, boutique resorts and Airbnb, more choices of interesting new places to visit are available than ever before.

Consequently, when they inherit the family holiday home, I think they will sell it — if they can. So over the coming decades, as the baby boomers pass on such assets to their children, a huge number of these properties will come on the market. Be they villas in Spain or on the French Riviera, apartments in Florida or the Algarve, or cottages in Norfolk or Cornwall, the market is likely to be saturated. This is the first generation when large numbers of holiday homes will be passed on — and, inevitably, those who inherit them will not be as attached to them as the original buyers were.

After all, a holiday home is the ultimate discretionary purchase. Unless you use it for a few months every year, or let it, you are financially better off renting somewhere or staying in a hotel on vacation.

People believe in the value of tangible assets such as buildings, but prices do not always go up. With rising interest rates, property prices are likely to be vulnerable. The London market is already weak; I fear others will follow. My view is that if you need to borrow to buy a holiday home, you should not be purchasing it in the first place.

Holiday home developers are partly to blame for the industry’s poor prospects. They often construct shoddy buildings and levy excessive service charges. They typically sell off-plan and frequently go bust before projects are completed. Many use hard-sell techniques and overbuild at the slightest opportunity. Meanwhile, buying and selling costs, from surveys to estate agent and legal fees, can be excessive.

Lots of markets are brimming over with unsellable homes and deeply disenchanted owners, from Turkey to the Caribbean, while overseas properties are also loaded with extra risks: legal differences, exchange rate exposure, security concerns.

Property is a lumpy, highly illiquid asset, yet many of us remain sentimental about possessing it. However, I fear a second home is as bad a bet as a pension pot. Shares are more suitable.