FOOL'S EYE VIEW
Is Property Better than Shares?

By Stephen Bland (TMFPyad)
September 10, 2001

A few words this week on whether property is a better long-term investment than equities. Ultimately it is probably one of those arguments that are incapable of positive proof one way or another, because individual experience varies so much. You can look at indices of long-term stock market growth and the same with house prices, but these are far too general to be of much use in my view.

This is so especially with houses, where there is a large difference between the growth rates of various areas or even within one area as fashion dictates up and coming or down and going over the years. But even with the stock market long-term index performance may be too general, unless you are investing in an index tracker. A portfolio of selected shares may have done much better or worse than the index.

I do not think there is much doubt that in my area of the country, London, residential property in general has been a pretty good investment for an extremely long time now. It has in fact been an excellent one in more recent times, and has certainly left the stock market for dead over the last few years. Growth rates even within parts of London will vary for reasons of fashion and so on, but overall it has been good.

Here's a real example. Wembley, 1959. The stadium, now derelict, was thriving. Electric trolley buses had recently been removed to make way for the stinking diesel buses that were thought to be the future. Rock'n'roll was in. Teenagers had just been invented. The rebellion had started and the roots of the freedom that kids today enjoy can be traced back to those days. Never again would someone command respect, not because they were wiser, but just because they were older. Bikers from all over frequented a transport caff known as the Ace Café on the North Circular Road; just reopened, incidentally. A small boy was about to start at the local Grammar School. How he envied those rockers on their bikes, tempting death and too often succumbing to it. One day he was going to have one too.

A house was bought there in that year for £4,300. It was valued recently at £300,000. This is an annual growth rate of 10.6% over 42 years. Roughly in line with the growth of the stock market. But there is more to it than that. The occupant has had the benefit of living in it all that time. The rent saved would be an enormous sum, much more than the dividends on shares. There was a mortgage on it originally, but that was paid off a long time ago.

Buying a property for your own occupation is essentially just that, a place to live, rather than an investment. It may have investment merit as well, in many cases, for example if it is family sized and you intend eventually to trade down to a smaller or cheaper property and realise some cash, or someone inherits its value after your death. But primarily the reason for buying a place is to have somewhere to live, and culturally in the UK buying is the norm, unlike many other countries where renting is more common.

Because of this UK property cultural thing, a whole industry of moneylenders has sprung up to advance mortgages to buyers and here we come to one crucial difference between shares and property as investments. There is no easy finance for a share portfolio. It is this gearing factor that enables such large profits to be made in property. With a 90% loan you can buy something that is ten times the size of your deposit and every one per cent rise in its value multiplies your interest in it by ten times that. For an asset that in the long term is expected to increase, this is a tremendously attractive proposition. But no bank will give you a 90% loan on some shares, not without additional security anyway.

I have to conclude that primarily because of the availability of mortgages, property, especially in London or other areas that show good growth, is going to be for many people a better investment than shares or other equity-based investments like pension funds.

And finally, even if someone was able to finance a share portfolio, it is unlikely that they would be able to beat the growth rate of property in London unless they had good share picking skills for a likely market beating portfolio. If they did not, and most don't, then merely buying the market through an index tracker is not very likely to beat London property, in my view, in the long run.

More: The Fool's Mortgage Centre | Is there a property bubble?