In the UK, we’re culturally ingrained to believe that the one investment everyone who has the opportunity to make should make is in a property. Home ownership is just financially sensible and provides security if it is a first property and a safe, profitable investment for those lucky enough to graduate to investment properties in addition to their own residence. Parents are ready to make significant sacrifices and dig deep into their own pockets to help their children on to the property ladder. Home ownership is something of a fixation in the UK.
We are certainly not here to discourage property investment, either as a primary residence or investment. Real estate has many merits and owning a home does provide a level of security and carefully selected investment properties have historically proven to be solidly performing investments. For those who buy at the right time, property can be a very profitable investment. However, a new study conducted by the USA’s National Bureau of Economic Research indicates that Generation Rent perhaps shouldn’t feel quite so bad about not owning their own property. It turns out investing online in equities might actually be the better investment when it comes to long term average returns.
In the UK, the average annual return of equities over the period since the end of World War II is in fact superior to that of property. The study, one of the most comprehensive ever made, examined data on returns generated by major asset classes between 1870 and 2015 across all major industrial nations. In the case of the UK, the results turned out to be different to what most of us probably accept as common knowledge. UK-based equities showed average annual returns of 7.2% over the whole period and property 5.3%. What was even more surprising was that from 1950 to 1915, a period that covered a huge boom in house prices, the gulf was even wider. Equities returned an average of 9.5% per annum and property 6.5%.
Another counter-intuitive fact that the study turned up was that returns on UK residential property have actually been among the worst for industrialised nations. Only Italy and Spain had weaker average annual returns from property. Perhaps one reason home ownership in the UK has dropped 10% from its peak is younger generations realising that perhaps home ownership is not the ultimate investment that previous generations have believed it to be.
It also seems highly unlikely, if not practically impossible, that property prices will see the same growth over the next 10, 20 or 30 years as has been the case over the previous decades. Affordability seems stretched to breaking point. That may well indicate that going forward we should expect returns on investment properties to be poorer than they have been. Investing online in equities indices that reflect the broader market through a tax efficient SIPP or ISA could well be the more profitable approach. It has actually been all along and the difference looks more likely to grow than contract Food for thought!