We all need a roof over our head. Renting is expensive, and owning our home means we have no need to fear the landlord and his annual rent hikes. But many of us have another reason for buying – because we believe our property is an excellent investment.
Its true that prices have become astronomical in some parts of the country, and many people have become property millionaires without lifting a finger – but property may not be best way to build our money at all.
According to research from global bank Credit Suisse, equity investment can offer far better returns over the long term.
As safe as houses?
The surprising conclusion was revealed in the Global Investment Yearbook 2018 produced for the Credit Suisse Research Institute by an expert team from the London Business School.
The study data stretching back over more than a century and covered a number of countries. It showed that the housing sector globally actually returned a loss of 2% a year, using a calculation known as quality-adjusted real capital gain measurement.
This takes inflation and other variables into account, including such surprising facts that in the US house prices fell by more than 36% in real terms between 2005 and 2012.
But what about the UK?
In the UK, away from the epicentre of the financial crisis houses have been worthwhile investments. Between 1900 and 2017, investing in the stock market, and reinvesting profits would have meant an annualised return of 5.5% while UK house prices saw increases of 1.8% a year.
The comparison is not entirely fair. The equity investments are boosted by re-investing dividends, while the figures for property do not take into account any returns from property rental income – which the authors confess was simply too difficult to calculate.
What does this really mean?
Overall, the report insists suggest that a pure investment in property will not deliver the returns many of us have come to expect.
Part of the problem is simply that housing is safe, despite issues like those in the US during the financial crisis. Low risk investments do not usually offer the best returns, because they do not offer a ‘risk premium’ the chance of extra returns that make a more speculative investment potentially more rewarding.
What should you do?
We have often mentioned the importance of diversifying your investments, and a portfolio that will reduce the risk that a particular asset class will fall might still include residential property, or a related fund. For a full financial planning experience, contact our team today.
The value of investments can fall as well as rise and you may get back less than you invested.
credit-suisse.com – Global Investments Returns Yearbook 2018 – 20th February 2018