With savers receiving poor returns from banks and building societies in recent years, thousands of people have continued to turn to residential property as a means of supplementing their income despite unfavourable tax and regulatory changes.
Investment in buy-to-let, for instance, has long outperformed most major asset classes, supported by low mortgage borrowing rates, solid demand from tenants and stable yields.
But new research from Rathbones, a well-established UK wealth and asset manager, suggests that investing in property as a means of building wealth is outdated with today’s investors generally unable to match the gains of past generations.
Researchers and economists at Rathbones analysed the relative performance of equity investment and housing, broadly over the past century. Their report, “Don’t Bet the House”, concludes that the boom years in property investment which lasted from the 1980s to the mid-2010s in the UK are now over.
Analysing UK house prices since 2016, researchers at Rathbones found that residential property barely kept up with inflation at 3.7% per annum over the past nine years. In London, where buyers previously enjoyed the biggest gains, housing did even worse, underperforming inflation by 2.2% a year, with house prices rising at just 1.3% a year.
This is in stark contrast to the experience of previous generations, mostly benefitting the so-called Baby Boomers born in the Fifties and Sixties. They benefitted from a golden age of property ownership between 1980 and 2016 when UK house prices rose at a rate of 6.7% annually – rising to 8.5% in London – well ahead of inflation. Their children however lack the same opportunity to build wealth through housing.
Instead, since 2016, stock markets have risen significantly faster than property prices. The research found that £100 invested in UK property in 2016 would have been worth £134 in 2024, but if the same amount had been invested in an indicative portfolio of 25% UK and 75% international equities, that would rise to £174; £100 invested in London property would be worth just £111.
“The idea that you can’t go wrong with bricks and mortar just isn’t true,” said Oliver Jones, head of asset allocation at Rathbones, who led the research. “The data shows that diversified global investment has put to shame returns from housing over the last decade – and we believe this trend will continue.”
“The earlier boom in house prices was fuelled by factors which no longer hold,” he continued. “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.”
On a long-term view, looking back over more than a century, Rathbones found the average house price hovered around four times average annual earnings between 1910 and the late 1990s. However, after 2000 this more than doubled, with house prices rising to as much as eight times average earnings, leaving property much more expensive for the typical buyer.
Further, after decades of low interest rates, global instability has created volatility in financial markets and fuelled inflation, pushing up mortgage interest rates. This has further impacted affordability for most first-time buyers and reduced the appeal of buy-to-lets and second homes used for holiday lettings bought using mortgages, acting as a drag on house prices.
“We’re being asked by many people who own second properties and buy-to-lets whether the time has come to sell up and invest their money instead,” said Ade Babatunde, associate financial planning director at Rathbones. “This research should be a wake up call to anyone relying on property to support their financial ambitions, especially when thinking about retirement or succession planning. The old idea that property will always deliver is for the birds and we strongly recommend taking advice.”
Rathbones’ latest research paper, entitled “Don’t Bet the House. Why the Golden Age of Property is Over: The Long View”, follows an earlier report also looking at long term trends against investment performance published in 2023. The findings form part of a webinar recorded this week at The London Stock Exchange with Rathbones economists and researchers.
Key points
+ A long-view study comparing gains from housing with investment since 1900 shows that the previous golden age for the property market is over.
+ Between 1980 and 2016, house prices rose by an average of 6.7% per year nationally and 8.5% per year in London, supported by a generational decline in interest rates and limited housebuilding.
+ But that has changed 2016, with London house prices rising just 1.3% a year, 2.2 percentage points below inflation.
+ Average UK house prices outside London only just kept pace with inflation, in contrast to the preceding three decades.
+ Unlike residential property, equities continued to rise by more than inflation; a simple mix of 25% UK and 75% global stocks has risen 3.4 percentage points a year above inflation since 2016.
+ £100 invested in London property in 2016 today worth £111, compared to same amount invested in stocks worth £174.
+ Many buy-to-lets, and second properties rendered ‘unviable’ as businesses due to high interest rates, toughening regulation, and slowing prices.
