Property has been a popular investment for generations (and recently even overseas property), as the attraction of bricks and mortar continues to lure more investors looking for alternatives to stocks and shares, particularly as a way of generating retirement income.
However, whether you should be looking at property in preference to stocks and shares depends on a number of factors, not least what returns you can expect from each and how easy or difficult it is to access them.
Property: Pros and Cons
There are a number of pros when it comes to investing in property, including:
- You can borrow money to make your investment in the form of a mortgage.
- You have an asset which, on balance, has increased in value over time.
- You can generate rental income from the property.
- You can live in a property.
- You have to pay to maintain and insure a property.
- You will be taxed on the sale of a property if it is an investment property/second home.
- You have a high level of costs associated with buying a property.
- The property can be subject to natural disasters or other damage.
- It can cost a lot to sell a property.
- The investment is not liquid and could be hard to sell if the markets are against you.
Stocks: Pros and Cons
- There is very little cost to buy shares initially.
- Many countries have tax-efficient wrappers, like the Individual Savings Account (Isa) in the UK which reduce or remove any tax liabilities.
- The investment is highly liquid, so if you want to sell your shares at any point, it should be easy to do.
- Shares can go up significantly in a single day.
- Shares can go down significantly in a day.
- If a company goes bust, it is possible to lose your entire investment.
- Buying shares outside of a tax-efficient wrapper means you could face big tax bills if your shares grow considerably over time.
- If you buy and sell shares on a regular basis, the charges you can incur will be substantial.
Which has performed better – house prices or stocks and shares?
House prices have done very well in the last 13 years, especially when you consider the correction during the credit crunch. The average house price in the UK, for example, was £150,633 in January 2005, according to the Office for National Statistics. By June 2018, that had risen to £228,384 – a 52% increase in value.
Shares have grown slightly more over the same period, but the difference is minimal. In January 2005 the FTSE 100 was at 4820.80, but by June 1, 2018 it had risen to 7701.77. This is a near 60% rise in value. If you consider the S&P 500, the growth over the same period is even more impressive. In January 2005, the S&P 500 reached a high of 1186.19. By June 2018 this had risen to 2779.66 – a rise of more than 134%.
So, which is the better investment?
Whether shares or property is the best investment depends on the period over which you are investing, and where the investment is made. The property and stockmarkets will perform differently in different countries, so this is something to consider when making your decision.
That said, a study by economists at the University of Californis, Davis, working with the University of Bonn and the German Central Bank which analysed data over 145 years to produce a paper called The Rate of Return on Everything, 1870-2015 – found that the average return over that period on property was just over 7% a year, with around half of that growth coming from rental income. For shares over the same period, the average annual growth was just under 7% so not substantially different, but still lower than real estate returns.
But which is right for you?
Choosing which is the best investment will largely depend on what cash you have available, and what other investments you already have in your portfolio. It will also depend on whether you want to buy and take care of a property, or prefer to invest your money in shares that have lower ongoing costs.
You must also have the appetite – and ability – to get a mortgage to invest in property, if you need to. The advantage of borrowing to invest, which is what you are doing with a mortgage, is that you can amplify the gains you make while taking a lower risk with your own money. The downside is you can amplify losses if the property market moves against you.
A diverse portfolio
No matter which type of investment you prefer, you will be in a better position if you choose to spread the risk you are taking with your money and that means diversifying your portfolio. If you have a large amount of money, then adding property to that portfolio might make sense. If not, tying up so much in a relatively illiquid investment could prove problematic if you need that money in a hurry.
If you are unsure about whether property or shares are right for you, then you should get some independent financial advice before making any decisions.
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