Returns as safe as houses?

Ed Monk
Ed Monk
Fidelity Personal Investing12 February 2018

Because you are a rational person who makes decisions based on evidence, you don’t need me to tell you that the stock market has returned more than the property market in the long term.

To be more precise, it has thrashed it. Land Registry data show that the average price of a UK home in December 1985 (the furthest back I could get figures for) was £30,463, and that this had grown to £226,071 by November last year - a 642% increase.

In the same time, the FTSE All Share has returned 1,808%. It’s not even much of a contest.

Yet these facts seem at odds with general perceptions of the two markets - something I’ve previously written on. For many people it seems that property is a one way bet while the stock market is only a small step away from gambling your money, with about the same chances of success.

There was further evidence of this mentality in the Office for National Statistics’ latest Wealth and Assets Survey, some details of which were published last week. It showed that property was considered the method of saving for retirement that makes the most of your money, with 49% of working age people surveyed choosing it over other ways to save. Employer pensions were the next popular choice, with 22%.

What’s more, the popularity of property as a means of saving seems to be increasing, with the share of people choosing it up from 40% in 2010, at a time when property price rises have slowed and stock market gains have been strong. And that’s before you get to the tax treatment for property gains and purchases, which has been getting steadily less generous.

So is this a case of a widespread misconception that runs contrary to the evidence? Are all these respondents deluded to think property will deliver the highest returns?

Not necessarily. It probably hasn’t escaped your attention that the comparison of returns above does not reflect how many people experience property market returns. The fact that most of us have to borrow vast sums to buy property, via a mortgage, means that the gains (and losses) from property price movements are highly “geared”.

For example, it might take a £40,000 deposit to buy a £400,000 home. If the property value rises 10%, the buyer is left with an equity stake worth £80,000 - a 100% return on their money.

Without the effect of gearing, the same 10% rise in the price means their stake has risen in value to just £44,000.

Geared returns can equally make price losses much worse. Thankfully very few recent homebuyers have experienced negative equity - where property price falls mean the outstanding balance of a loan becomes larger than the value of the home, meaning owners cannot move without taking a large financial loss.

The last widespread bout of this came in the 1990s. Those who suffered could not be blamed for finding themselves in that position - they had sought to secure the roof over their heads, and suffered when the market moved against them.

Buying property as an investment is different - particularly if it is geared with debt. There would have been much less sympathy if these people had borrowed similar sums to invest in an asset like shares as a means of making money, yet the risk of using mortgages-funded property as an investment is the same.

People are not wrong to believe property will be the most lucrative place for them to focus their retirement saving - with geared returns and rising prices, it very well could be. They should, however, understand that there is nothing magic about property prices. As we can see, the underlying returns from property have been far more pedestrian.

Five year performance


As at 31 Dec






 FTSE All-Share






Past performance is not a reliable indicator of future returns

Source: Datastream from 31.12.12 to 31.12.17, total returns.

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