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Property investment - a long view (pt 1)

This is an article about property investment and how it relates to investing in general, not Orbis Access in particular.

Property investment

How healthy are the returns?

Investing in property has become something of a national obsession, rather like talking about the weather. But is property always the best investment you can make?

Property v. shares and bonds

The headlines look good for those who invested in property over the long term. Houses that cost a few thousand pounds now sell for hundreds-of-thousands, even millions. In real terms, after inflation is taken into account, UK house prices have risen four-fold since the 1950s.

An in-depth analysis of property prices by Neil Monnery*, published in 2011, quotes average annual investment returns since 1952, for typical types of asset, as follows:

 

House prices (real)

Stocks & shares (real)

Gov't bonds (real)

1952-2010 2.4% 6.9% 1.9%
1980-2010 2.5% 7.9% 5.9%
1995-2010 5.2% 3.8% 4.3%

Source: Barclays Equity Gilt Study, 2011

Surprisingly perhaps, only in the fifteen years between 1995 and 2010 did property outstrip shares as an investment. If you take a longer sweep, over 30 years or 60 years, shares come out on top.**

The long view

Monnery goes back further. The data are not as robust, but his surprising conclusion is that real house prices in 1960 were much the same as they had been in 1900.

He calculates that between 1900 and 1995, the average annual increase in property prices was 0.8% in real terms. This contrasts with a more robust 2.4% since 1952 and 2010, not to mention a whopping 5.2% in the fifteen years after 1995.

It took 70 years for property prices to double in real terms after 1900, yet they did so again in just nine years between 1998 and 2007.

The notion of property being a desirable investment is in fact a relatively modern phenomenon. It started to get a grip on the national consciousness after the 1960s and only in a really big way from the 1980s onwards.

UK Real House Price

Other countries

So much for Britain. What about the rest of the world? Is our experience of property prices typical of other countries? The short answer is no. The story of house prices around the globe is a mixed bag.

In the USA real prices haven’t changed much over the course of 100 years. In Germany real prices also stayed put for 40 years – from 1970 – despite a booming economy for much of that time.*** On a negative note, real house prices in Tokyo crashed 45% after their 1990 peak.

Other places have enjoyed buoyant markets. Australia, Holland, Ireland and Norway all saw property prices more than double in real terms between 1990 and 2007. While homes in Australia, Holland and Norway weathered the global financial crisis of 2007-8 reasonably well, in Ireland prices had halved by 2012 (although prices rose again in 2014 and 2015).

Will UK house prices keep going up?

The unhelpful answer is that it’s perfectly possibly that they will…and it’s perfectly possible they’ll go down. However, most economists agree house prices can’t keep rising in real terms indefinitely.

After all, this could lead to a point where mortgage repayments on the average home are bigger than average household income. Families having to put aside every last penny of their earnings to pay off the mortgage simply doesn’t add up. So house prices should ultimately have a ceiling.

Historically, property as an asset type has tended to yield lower returns than stocks and shares over the very long term, but on the plus side those returns have been less volatile. And like all assets, the higher the price you pay in the first place, the greater the risk that your long-term returns will be disappointing. 

House Price Ratio

* “Safe as Houses? A Historical Analysis of Property Prices” by Neil Monnery.

** It’s important to remember that these average figures don’t reveal big swings, both up and down, that occur within each period. An average return of 5% doesn’t mean you’ll make 5% year-in, year-out. You could lose 5% one year. Gain 16% the next. And so on.

*** Since 1970, before which time reliable data is not available.

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