Over the last 30 years, stocks and shares have given investors great returns, but Halifax house price data for the 2000-2014 period shows £100,000 invested in property brought in a 132% return, whereas the same sum put into UK equities, even with dividends reinvested, made just 83%.
Since 2014, property prices have surged partly down to demand continuing to outweigh supply across many parts of the UK, highlighting the desperate need for more new homes, including affordable housing.
So why is property such a good choice for many investors and what makes it stand out from other asset classes, such as equities, gilts and bonds?
If we take a long term view, it is easier to see how property performs better. Over the last 35 years, for which accurate house price index information is available, house prices have increased 11% per year on average, whereas the stock market has produced around 13% growth. Based on these figures, it appears that the stock market is a better place to invest, but this is not the case.
Stats from Assetz plc show that if a property is purchased with, for example, a 20% deposit (equity), a 5% price gain is actually returning 25% on your equity in just that one year – for example, a £100,000 property bought with a £20,000 deposit and going up 5% or £5,000 would make a 25% return on a £20,000 deposit. However, if the property was purchased for cash then a 5% gain would only return 5% on equity. Recent gains of 10% to 20% in property prices per year and the resulting 50% to 100% return on equity is what has attracted speculative property investors. These large gains are due to the power of ‘gearing’ and it should be noted that if prices dropped by 5% the same magnification would apply to the losses, so property should never treated as a long term investment.
For example, if a property was purchased in 1969 with a 20% deposit, then the capital gains as a return on the cash invested would not have been 11% as quoted above, but a much greater 16% per year. This type of long-term return is exactly why so many investors prefer property as a place to invest their money.
Many investors are acquiring residential property as part of a pension fund, rather than risking the stock market, which has been volatile over recent years. The pension scandals have knocked investor’s confidence. Investors that acquire property in the best BTL hotspots in the UK, can enjoy yields of between 8-12%, excellent capital growth and steady rental income.
The good news for investors is that if property price inflation in the UK averages 5% a year over the next few years, investors will reap a 20% return per year on a 25% deposit.