Anyone under the age 50 could be forgiven for thinking that UK house prices only go up.

Yes, there have been periods when prices have fallen — the aftermath of the global financial crisis in 2008, for example — but the general trajectory has been steadily upwards.

No wonder so many people now see properties as financial investments that will help to fund their retirement. Indeed many view property as a better investment than shares. But does the evidence tell us about that?

Each year, Professors Elroy Dimson, Paul Marsh and Mike Staunton of London Business School produce a publication for Credit Suisse called the Global Investment Returns Yearbook. In it they show how the different asset classes have performed over the very long term — specifically since 1900.

There are several complications when assessing residential property as a financial investment. Most owner-occupiers, for instance, will need to take out a mortgage, and regardless of the size of the property, there are on-going maintenance costs involved in home ownership too. For landlords, those expenses are offset to some degree or other by rental income.

 

Shares have outperformed property historically

But, in real terms, how much have house prices grown since 1900? You might  be surprised at how low the average price rise, after inflation, actually is.

Dimson, Marsh and Staunton analysed the data for 11 different countries for the period from 1900 to 2018. Over that time, they calculated, property in the UK rose by an average 1.8% a year. The average annual price rise across all 11 counties was 1.3%, and the figure for the United States was just 0.3%.

How then, does that compare with returns from shares? Well, over that same period, equities produced much higher returns than houses. US equities, for example, rose by an average of 6.5%. The average return for the rest of the world was 4.5% — two-and-a-half times the average return for UK property, and more than three times the average for property across the 11 markets the authors looked at.

“Housing has been less risky than equities,” the 2018 Yearbook states, “but the expression ‘safe as houses’ is misleading.” As an example, Dimson, Marsh and Staunton cite the US, where “house prices fell by more than 36% in real terms from their late-2005 peak until their low in 2012”.

 

Prices falls are fastest since 2009

Right now, we are seeing another downturn in the UK housing market. According to recent figures from Nationwide, prices fell 3.1% in the 12-month period to the end of March. That’s the fastest annual rate since 2009. Prices have now declined seven months in a row, which leaves them 4.6% below their most recent peak in August.

Despite signs that prices may be stabilising in some parts of the country, Robert Gardner, Nationwide’s chief economist, is warning that it may be some time before they start rising again.

“It will be hard for the market to regain much momentum in the near term since consumer confidence remains weak and household budgets remain under pressure from high inflation,” Gardner told The Guardian last week. “Housing affordability also remains stretched, where mortgage rates remain well above the lows prevailing at this point last year.”

Property consultancy Knight Frank is more bearish still. In its latest forecast for the housing market it says: “We still expect UK house prices to decline by around 10% over the next two years as the impact of higher mortgage rates takes its toll on affordability.”

 

Avoid being over-exposed

The truth is that nobody knows where the price houses are heading next. But it’s simply not true that investing in domestic property is a one-way bet. As ever, the most sensible approach is to stay diversified and not to be over-exposed to any one type of asset.

If you own your own home, you are already heavily exposed to residential property. If you’re thinking of either trading up to a bigger house or investing in a second property, you need to think carefully whether the benefits outweigh the additional costs and risk involved.

Buy-to-let investing is certainly much less popular, as well as less profitable, than it was. Falling prices, higher mortgage costs and changes to capital gain tax have all played a part. Many investors with large buy-to-let portfolios are now selling.

They key with property investing, as with all types of investing, is to have a long-term focus. But even then, don’t invest in property expecting to make a big financial gain. To quote Dimson, Marsh and Staunton: “Residential property should not be purchased with an exaggerated expectation of a large risk premium. It is equity assets that provide an expected reward for risk.”

 

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