Background
We are currently in a time of international property woes. Banks in much of the western world are facing liquidity and confidence problems because of greedy investments in dubious investment vehicles that were based on bad quality property loans in the US. As usual while huge profits were made by those driving those investment vehicles there were almost no voices in the financial world who were predicting that the market was unsustainable.
DISCLAIMER: Oregano is no financial adviser or genius. The following is just "stream of consciousness output" and may not be construed as financial advice. Indeed Oregano's stock picks are usually best avoided!
Dire Warnings
I am an engineer, not an economist, but there have been a few worrying signs around investments in the last decade. In the 1980s I did (to my later regret) not take advantage of the privatisation of UK companies e.g. British Telecom because I felt it was wrong that the Government was selling assets owned by taxpayers. I later realised that it was good if most citizens participate in the stock market but am still very sceptical about the ideologically-driven (rather than taxpayer value-driven) privatisations in the UK. I still fear it was essentially redistribution of the wealth of the UK from the taxpayers to the wealthy.
When Deutsche Telekom offered its customers shares when I lived in Germany in the 1990s I already owned shares of a few companies and took part profitably. Shortly after returning to the UK, I was amazed that taxi drivers in Munich were giving me stock tips. On the one hand it was a sign of progress that German citizens were finally making their own stock investments, however on the other hand it was a scarey signal. Most market bubbles take place when naiive investors get involved - and with all due respect for my taxi driver - we were about to hit the telecom bubble bursting. I heard that chambermaids took part in the final stages of the South Sea Bubble in the 1700s.
I bought my first property in 1985 midway in a big upswing in the London property market. After having moved to Germany we decided to sell in 1989 which was just when the market bubble was bursting. Foolishly I was greedy and listened to an estate agend (in his mid 20s) who convinced me that the market trajectory was continuing and that I should adopt an aggressive selling position. A rival - actually Halifax agent - of the same age - said that the market was slowing and that I should expect a lower selling price if I wanted my property to go. The Halifax guy was right and I ended up selling much later than expected and at a lower price than he had suggested.
We should not be surprised at a mortgage problem in the UK quite independently of the US mortgage crisis. When I bought my first property I was allowed to borrow 2.5 x my salary. Two years ago I was hearing of offers of 6 x somebody's salary. OK, interest rates are much lower than in the 1980s but this is a sign of an exuberent unsustainable market.
Assets and Investments
In Germany when I made my first investments in stocks and bonds my first step was to buy a 100-page paperback on investing. This German language guide was simply written (just as well given my language skills 
) but has never been contradicted by what I have subsequently read in the British or US financial press.
Three key things were:
a) Understand allocation betwen different asset classes e.g. shares, bonds, property and cash. There are different risk/reward relationships with any of these asset classes. Shares may go down dramatically as well as go up; though on average give better returns than bonds. Bonds are subject to less volatility but on average have lower returns. Cash is not volatile but tends to have low returns. Property often has had spectacular gains or losses but unlike shares is not liquid. In a down market it may be relatively easy to dispose of shares but tough to dispose of property. Similarly in an overheated market it is still possible to purchase shares (at an inflated price) but may be tough to acquire property.
b) Diversity risk. Regardless of asset class it is important to diversify the investment. For example, it is safer to split a stock portfolio between 10-20 shares rather than say 3 shares. It is safer to split a property investment between 10 properties than 2. It is safer to split retirement savings between 3 fund managers than just one; remember Equitable Life.
c) Investment Horizon and Liquidity
With any investment you are expecting a payback sometime. Most issues depend on your investment horizon; in other words do you want a return in say 18 months or 10 years. The answer will determine your attitude to risk. A short investment horizon will mean risk minimisation while a longer horizon will make more risk taking attractive.
In either case it is important to consider liquidity - the ability to buy or sell assets. A market with no liquidity works against any short term investment strategy. In the short term bonds or stock are better investments in general than property because they can be disposed of easily.
Property Focus or Obsession?
In the UK, the desirability of investing in property has been unquestioned in my lifetime whether by the man/woman in the street, journalists or financial institutions. However while that might be reflected in say the US or the Netherlands it is not necessarily reflected in say France or Germany. In some of these countries I fear that most people - those in favour of property investment or against - have not thought through the basic principles.
Bubble property conditions aside, I worry when friends have referred to their nice house as their "pension". In an inflating property market that might make sense providing you convert the asset into a pension-friendly form when you are close to retirement. In a deflating market too much tied up in property can be tough to dispose of. You also need to be willing to downsize or move to a less expensive area to realise the "pension".
My fear is that too many people in the UK have invested in property (rather than say alternatives like stocks or bonds) withouth thinking through the consequences. Property does not create value in the sense that say a growing company can. Its value (and potential rental income) is really based on supply and demand so is a good investment for a period of time when accomodation is in short supply but no good if there is oversupply. Company shares potentially can provide more if they innovate or establish new markets. Think of Apple in the last decade with their iPod products or ARM in the UK. Of course companies can stagnate too.
Of course there is one very good reason for purchasing property and that is to provide a roof over your head. This avoids rental payments (though generally mortgage payments will be greater) and gives more control over the property. The obvious advantage of owning is that after the loan is paid off there are no further payments needed plus the asset can potentially be sold.
Of coursre the value depends on what subsequent purchasers think. Having paid off a mortgage, a declining asset may be a millstone round the neck.
Buyng for Rental?
This is a tricky area where I cannot give good advice other than to be cautious in the current climate. I would rather live off a property portfoilio than do my present job..Yet I cannot conceive that I can purchase such a portfolio in the short-term despite depressed markets. However I can more readily purchase assets in depressed stock markets.
Right timing can produce fantastic gains in property asset values but requires more research than I have undertaken.
I am betting - and this is absolutely no investment recommendation!! - that the stock market will recover more quickly than the property market. Even if the stock market mildly corrects as an investment it also has the advantage of being more liquid.
...Sorry for rambling so long.
