Many people love the idea of investing in property. After all, a home is an asset you can smell, feel and easily understand. Plus, the beauty of many properties can also make the investment an artistic one and a labour of love. It has also been argued that homeownership is an important cultural value within British society, and property investing taps into that.
However, the picture isn’t completely clear. Despite the importance of homeownership to many British people, for instance, the UK now holds one of the lowest rates of homeownership in Europe (about 63.5%); lower than Croatia, Slovakia and Hungary. Much of the decline has been attributed to rising house prices and increasing unaffordability particularly for young people.
Homeownership is still widely regarded as a sign of economic progression. A property portfolio, therefore, is commonly viewed as a hallmark of high personal wealth and success. Yet, is building a property portfolio the best way forward for most people? In particular, could the stock markets hold better prospects for building and preserving wealth for you and your loved ones?
In this short guide, we will be offering some thoughts on these very questions and we hope you find this content informative.
Property vs. the Stock Market
The question of whether or not property beats the stock market as an investment depends on the perspective you take. Below are some of the main areas to consider:
Here, the question essentially asks which investment generates a greater profit but this isn’t as easy to establish as you might think. It is important to remember that there are many hidden costs involved with both property and stock market investing. The former will carry maintenance costs and repairs which affect your property portfolio, whilst the latter could be affected by excessive annual investment management fees that deplete rates of return.
There is also the investment timeline to consider. How many years should your comparison analysis be over and in addition to this, which properties or stocks are you comparing? For instance, properties in one part of the country may rise in value whilst others fall. Certain market indexes are also likely to vary in performance.
One interesting study is the research conducted by the Credit Suisse Research Institute, which compiled data over the last 118 years to find out where property out-performed stocks when it comes to rates of returns. They found that, on average, investing in UK stocks between 1900 and 2017 would have net a 5.5% rate of return each year, whilst house prices rose by 1.8% per year. So despite popular belief, Property does not necessarily provide a better return than the stock market over a period of time.
Many believe that property holds better tax benefits than the stock market, yet this is a complex area.
Take Capital Gains Tax as an example. In 2019-20, you can earn up to £12,000 per year in Capital Gains without incurring any tax liability. This applies to the sale of owned property (excluding your main residential home) and to stock market investments, which you might sell after they have increased in value.
However, stocks still arguably have an edge over property as far as taxation is concerned, for at least two reasons. Firstly, you can shelter up to £20,000 of stock market investments within an ISA each year where gains made on investments are exempt from Capital Gains Tax (CGT). This is not possible with a Buy to Let property. Secondly, you can buy and sell your shareholdings over time, possibly keeping everything under your £12,000 CGT annual allowance. However, Capital Gains on property sales must be dealt with all at once and are likely to far exceed this allowance.
Investment risk is closely linked to rates of return. As a general rule, the greater the risk, the higher the level of potential return from an investment. So in theory, since stocks appear to offer greater returns than property, the latter should be less risky?
Over time, the stock market is likely to be more volatile than the property market. If you choose not to invest for the longer term (i.e. more than 5 years) then stocks and shares could be considered a more speculative investment depending on how markets have performed. However, there are at least two ways to mitigate this risk. First of all, diversifying your portfolio across different types of holdings, geographical areas and asset types can help spread the risk. Secondly, stock markets have historically grown over the years despite short-term volatility. By staying invested in the market when prices fall rather than “panic selling”, you can often weather the storm and benefit from the eventual upturn when markets recover.
Of course, it’s important to note that property investments are not inherently risk-free or immune from volatility either, as the 2008 financial crisis should remind us.
This content is for information purposes only. It does not constitute investment advice or financial advice. If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS please get in touch.