Why the golden age of property investing is over
The property boom times are well and truly over, with returns now lagging behind the stock market.
Tighter regulations, slow wage growth and more housebuilding mean that profits on bricks and mortar have been heavily diminished, according to analysis published today by the investment manager Rathbones.
In their Don’t Bet the House report, researchers concluded that the golden age for property investors was between 1980 and 2016 when house prices rose an average of 6.7 per cent a year — 8.5 per cent in London. After inflation, that was a real-terms increase of 3.3 per cent a year — 5 per cent in London.
Since 2016 however, house prices have barely kept up with inflation, rising 3.7 per cent a year compared with the 3.5 per cent rate of inflation. Prices in London went up a paltry 1.3 per cent a year, underperforming inflation by an average of 2.2 percentage points a year.
Rathbones said that many of its clients who own second properties and buy-to-lets were asking whether the time had come to sell up and invest their money instead.
The firm found that £100 invested in UK property in 2016 would have been worth £134 in 2024. If £25 had been invested in UK stocks and £75 in global stocks, each matching the return of their benchmark indexes over that time, the investor would have £174. A £100 investment in London property would have grown to £111.
Oliver Jones from Rathbones said: “The idea that you can’t go wrong with bricks and mortar just isn’t true. Diversified global investment has put to shame returns from housing over the past decade — and we believe this trend will continue.”
What comes next?
Landlords have had to come to terms with a series of tougher regulations that have made it harder for them to make a profit. For example, they can no longer deduct all their mortgage interest from their rental income for tax purposes, giving them higher tax bills. It has also become more expensive to buy an additional or buy-to-let property, because they are subject to higher rates of stamp duty.
The growing disparity between average house prices and wages has also made buying less affordable. Between 1910 and 1998 the average house price was close to four times average annual earnings. Since 2000, houses prices have been an average of 7.3 times average earnings.
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Jones said: “The earlier boom in house prices was fuelled by factors which no longer hold. The huge decline in interest rates from their generational high in the early 1980s won’t be repeated. Homebuilding is rising after decades of very low rates and government policy has become progressively less favourable to investors in residential property since the mid-2010s. The idea that money is safest in houses simply is not true any more.”
Property prices fell 0.8 per cent last month, according to the Nationwide house prices index released on Tuesday. It was the biggest monthly decline since February 2023. Over the past year prices rose 2.1 per cent, although that was the slowest annual growth rate for nearly a year.
Nationwide, however, said it expected activity in the housing market to pick up. Robert Gardner, the bank’s chief economist, said the situation for those looking to buy a house remained “supportive”.
The estate agency Knight Frank expects annual house-price growth to hit 3.5 per cent by the end of the year, up from its previous estimate of 2.5 per cent, thanks to lower interest rates and an improved economic outlook. Over the next five years, it expects prices to rise 22.8 per cent.
Tom Bill from Knight Frank said: “Some investors like the fact that property is less liquid and prices are less volatile than the stock market. House-price growth has admittedly been slower since 2021 as interest rates rose from record lows, but prices will be underpinned by the fact that more people now own their home outright than have a mortgage.”
Sarah Coles from the investment platform Hargreaves Lansdown warned of the high costs property investors must consider. She said: “Property is one of the least tax-efficient investment options available.
“If you rent it out, there’s income tax to pay on rental income, and because of frozen tax thresholds and rising rents, mean more of this is being taxed at higher rates.
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“Finally, when you come to sell, there may be capital gains tax to pay. Unlike with stocks and shares where you can realise gains gradually to take advantage of the annual CGT allowance — and avoid CGT altogether by investing through a stocks and shares Isa — there’s very little you can do to get around paying CGT on gains made on second homes.”
Oli Creasey from the wealth manager Quilter Cheviot said there were still opportunities to be had from commercial property.
“One should not assume that what holds for residential property is also true for commercial property in the UK. Unlike residential, commercial buildings were repriced decisively as interest rates rose, and are now available to buy at relatively sensible prices,” he said.
You can avoid many of the costs of physical property ownership through investment companies known as real estate investment trusts (Reits). These are listed, like shares, so can be easily traded with low costs.
Creasey said Reits worth considering included LandSec, British Land, Segro, Tritax Big Box, Derwent London and Shaftesbury Capital.
He said all had property portfolios worth more than £2 billion with share prices at about 20 per cent below their net asset value, which means their assets are worth more than the share price would indicate. They also pay dividends, with an average yield for these types of investment of about 4.7 per cent.
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