For the ordinary investor this chapter might be put into one word, "Don't." We have seen in Chapter V that investments in "real or heritable securities," by which I understand that real property and mortgages thereon are meant, are permitted under the Trustee Act; but such investments have been in the past a fruitful source of loss to beneficiaries under trust deeds, when trustees, on their own responsibility or under the advice of solicitors, have put funds into mortgages on house property that has declined in value, as house property is liable to do without the process being evident to anybody but the keenest observer.
This is the essential difference between real property and Stock Exchange securities, that the latter have a quotation—sometimes more or less nominal it is true, but at least a quotation and a record indicating business done in them, that can be studied in the daily papers. With house property there is no such facility for watching the value of the investment, and this lack, among other things, makes it quite unsuitable for an investor, unless he is confident that his interests are being guarded, with unceasing vigilance, by a solicitor or other agent, who gives close attention, and brings real knowledge, to the matter. Investments in Building Societies suffer from the same disadvantage, and an investment that cannot be watched is not one to be looked at.
Even ground rents, which rank as a gilt-edged security—and with good reason when they are good—inevitably suffer from the same lack of a free public market, and can only be indulged in on the most competent technical advice.
Anyone who buys houses outright and hopes to receive from them an income, after he has collected the rents and paid all outgoings, is indulging in a frankly speculative form of investment.
It may come right just as a purchase of shares in an oil-field that has not yet sruck oil may come right, but it requires so much technical knowledge or so much good luck, that it is outside the range of the present inquiry, which seeks to light a candle by which the ordinary citizen may invest his money with reasonable safety and with a reasonable chance of increasing it. The owner of house property—the "bloodsucking landlord" as he is so often described—is very lucky if he gets an average net yield from it which is better than what he could have secured on the Stock Exchange with much less anxiety and trouble; and, owing to his general unpopularity and the subservience of modern Governments to the prejudices of the multitude, he is likely to be treated with the gravest injustice at times when the service that he provides for the public is most essential and costs most to increase or reproduce.
The man who buys a house to live in is evidently in a quite different position. He has a good tenant, who will not be exacting about repairs—in fact the owner-tenant is likely to go wrong in the other direction and forget that houses wear out. If he has chosen a good neighbourhood and paid a reasonable price, he may do well by his investment.
But landlords are at all times especially hard hit by a general rise in prices because of the comparatively long terms for which they dispose of the use of their property. An owner who lets a house on a seven years' lease may have the greater part of his net income wiped out by a rise in prices which adds 10 per cent. or 20 per cent. to the cost of structural repairs, and to the prices of all the commodities which he has to buy out of the income from the lease. This is a risk that he has to take, and in normal times it is balanced by the consequent addition to the money value of his property. But by the Rent Restriction Act of 1915 the Government, having first made the position of landlords difficult and unprofitable by debasing the currency (which perhaps it could not avoid), proceeded to forbid them to raise rents, so inflicting serious injustice on a class of investors who provide the public with the essential service of shelter, at a time when providers of and dealers in food and coal and munitions were earning peerages by making fortunes out of the nation's need. And at the expense of the unfortunate landlord a very comfortable benefit was conferred on the tenant, who was probably earning a larger money income than ever before and made hay while the sun shone by taking in lodgers. A class that is faced by great difficulties and anxieties in normal times, and in abnormal times is sacrificed to the prejudices of its customers and the opportunism of Governments, is not one that any prudent investor will join unless he knows the ropes so well that he is absolutely certain that he is not making a mistake.
An investor who confines himself to mortgages on real property is in a stronger position, being, or hoping that he is going to be, not an owner but a creditor, with all the advantages that we have seen to be attached to that position, with the addition that in the matter of real property the right of foreclosure that goes with a watertight mortgage is more practical and valuable than we shall find it to be when we come to consider the question of industrial debts.
Foreclosure means the right, if the debtor does not pay interest or repay the debt if it be demanded, to sell the property over his head and repay oneself out of the proceeds, the balance, if any, going to the debtor. This right is more practical and valuable with regard to houses and land, because they are articles that are wanted to a certain extent on their own account and have some sort of a price whatever be the circumstances of those who live in or on them, whereas a factory or the building in which a great multiple shop is carried on, or a railway station, might, if the enterprise that uses it is a failure, be quite unsaleable and a mere encumbrance to anybody that seized it for the payment of a debt, who would have to begin by spending money on rebuilding it before it could be sold.
This advantage, however, is only one of degree, because even houses that are too elaborate for a declining neighbourhood often have to be converted into flats or "maisonettes" before they can produce a revenue; and in spite of it, mortgages on house property seem to me to be nearly as unsuitable for the private investor as outright ownership.
If he indulges in mortgages he lends money to the owner of house property or to the owner of a lease, usually up to what is believed to be two-thirds of the value of the freehold or the lease. The owner pays him interest, half-yearly or quarterly as may be arranged, and is usually bound to repay the amount of the loan at any time, on receipt of such notice as is provided by the contract. The lender can at any time transfer the mortgage to any buyer to whom he chooses to sell, and in case of default by the debtor can exercise the right of foreclosure already described.
At first sight one might well ask, What more by way of security could Shylock or Master Dumbleton require than property which is worth half as much again as the amount lent, with a right to demand repayment at any time, and seize the property if the debtor fails to pay? And in fact those wise and wary investors, the insurance companies, habitually place enormous sums in mortgages on freehold and leasehold property. Why should you and I fear to tread where these angels rush in? Because the insurance companies, making these investments on a magnificent scale, and deriving from them a princely revenue, can afford to expend upon them the funds necessary to secure the professional vigilance that is necessary in the case of property whose value has to be constantly watched, and watched by an eye that can detect symptoms of decay, because there is no market quotation. With this safeguard, the application of highly qualified expert knowledge, mortgages are a very pleasant form of debt to an investor who can afford it.
Without it, you and I would be in danger of lending £1,000 on property valued at £1,500—or not only valued but known to have changed hands yesterday at that figure—and then finding in ten years' time, either because we ask the debtor to repay it and he cannot do so, or because we cannot get him to pay the interest, that our attempt to get our money back by foreclosure is a dismal failure, because the property is not worth £500. If we are very ignorant and unjust we may call the valuer bad names and threaten him with proceedings; he will say, with perfect justice, that all he said was that the property was worth £1,500 ten years ago, not that it was going to stay there till the crack of doom.
And even if all goes well and the debtor is solvent and the property keeps its value, the irregularity with which the interest on mortgages is habitually paid, makes them compare very unfavourably, for an investor who wants to receive his income on certain dates, with Stock Exchange securities. The great majority of public debts and company debts and preferences pay, if at all, on the due date as punctually as the sun rises. The mortgagor pays after such interval as suits his convenience, and usually after having his memory jogged by the mortgagee or his agent.
Land and houses, in spite of the fact that they are real and solid and "cannot run away," and their owners and the owners' creditors can go and look at them and see that they are there, are liable to enormous fluctuations in value both upwards and downwards.
And land and houses are nearly always what the Stock Exchange calls an "all one way market"—either all buyers or all sellers—and consequently difficult and awkward to deal in. A few years ago industrious agents were plastering England with titles to urban freehold plots in the neighbourhood of Canadian cities that were going to rival the growth of Los Angeles and New York, and some of the buyers, who were quick enough in turning round and selling, made mouth-watering plums out of the gamble. Those who did not are still waiting for the growth of those modern El Dorados, and in the meantime look ruefully at a tin-box full of unsaleable title deeds.
But there is no need to go abroad to see big fluctuations in real property values. Some of us can remember the time when ground near Hindhead fetched less than £10 an acre as heathy and indifferent grazing. Since Hindhead became a health resort and an opulent suburb the price per acre ranges up to £2,000. Contrariwise, streets of what were formerly fashionable mansions in certain parts of London are now dwelt in by a precarious population of weekly lodgers and are little better than slums.
Such are fluctuations which the investor in mortgages has to face. But if the fluctuation be upward he is paid off and has to find another investment. If it be downward, he loses his money or some of it, after a host of worries and legal technicalities and expenses. For you and me, it is a case of "no bid." As Dante says, "let us not speak of them, but look and pass."[1]