‘Property is my pension.’ It’s a refrain that advisors will have heard countless times over the decades. It is especially popular with the rich and famous.
Pick up a weekend newspaper and celebrities interviewed about their money often say the mantra with conviction.
Little Jimmy Osmond, a pop star from the 1970s, provides such an example. Jimmy Osmond told us in 2015 that he had lost £1.3 million in the 2008 US property crash, but he still believed investing in physical products was better than investing in shares.
Such a commitment to ownership is strong in the US, but is arguably even stronger in Britain. Property prices and buy-to-let dilemmas fill online forums and spill into conversations at British dinner parties.
Some hope to downsize and reap some of the profits made, free of capital gains tax, while some of Britain’s 2.5 million landlords plan to sell their homes to fund their retirement.
How does this commitment to real estate work out?
Home Prices vs. Inflation: Real estate values have skyrocketed in recent years, but so has the cost of living. What happens when you compare the two?
The truth is that house prices have been falling for some time. That feels contradictory to what appears to have been a steady increase since the 2008 financial crisis.
However, inflation has risen faster, offsetting gains in real terms. Of course, most of the damage has already been done in the past two years. But over longer periods, the picture looks bleak.
Estate agents Savills analyzed decades of data from the Nationwide house price index and found a number of striking facts:
- UK house prices have fallen by 2.8 percent in nominal terms since a peak in March 2022, but by 13.4 percent when inflation is included
- The average UK buyer will have made a loss in real terms (after inflation) if they bought after December 2015
- Some areas have yet to recover to 2007 levels after adjusting for inflation
The table shows the magnitude of the decline, with each region and country far from the peak price, although these peaks occur at different times. The average decline from Britain’s collective peak in 2007 was 12 percent in real terms.
| Region/country | Peak date | Current price versus peak |
|---|---|---|
| LONDON | Q2 2016 | -16.7 percent |
| OUTSIDE WITH | Q1 2022 | -12.9 percent |
| OUTSIDE ZOESTE | Q1 2022 | -12.4 percent |
| SOUTHWEST | Q2 2022 | -12.7 percent |
| EASTERN ANGLIA | Q1 2022 | -13.0 percent |
| WEST CENTER | Q3 2007 | -9.0 percent |
| EAST CENTER | Q3 2022 | -11.3 percent |
| NORTH WEST | Q3 2007 | -19.5 percent |
| YORKS & THE HUMBER | Q3 2007 | -21.2 percent |
| NORTH | Q3 2007 | -27.8 percent |
| WALES | Q2 2007 | -18.7 percent |
| SCOTLAND | Q3 2007 | -27.8 percent |
| N IRELAND | Q3 2007 | -50.6 percent |
| Britain | Q3 2007 | -12.0 percent |
| Source: Fidelity using Savills data based on the National House Price Index and UK inflation | ||
It’s a stark reversal of the fortunes of the decades before.
Baby Boomers and Generation Between 1952 and 2007, inflation-adjusted prices rose 3.1 percent per year.
That doesn’t seem like much, but it’s remarkable considering the 1970s’ periods of rampant inflation (annual price increases peaked at 25 percent) and three real estate crashes, starting in 1973, 1979 and 1989.
Amid a surge in Britpop and Spice Girl confidence, the mid-1990s real estate party made a strong contribution to achieving that long-term average for property prices of 3.1 percent, while also maintaining low inflation of the 1990s played a major role.
In 2007 the picture changed. As Savills highlights below, we have gone back to the 1970s. Despite very low inflation between 2010 and 2020, real estate prices have gone sideways.
Real House Prices: Once property prices adjust for inflation, profits decline significantly
Has the stock market outperformed real estate?
If real estate hasn’t produced a pension over the past fifteen years, has the stock market, a common alternative, done better?
Since 2007, when inflation-adjusted property prices fell 12 percent, the FTSE World index, a benchmark for global stock markets, has grown 68 percent, Fidelity data shows. This amounts to an annual increase above inflation of 3.51 percent.
These amounts do not include dividends paid to shareholders.
If this is included and assuming that the income is reinvested, the real return almost doubles to 6.14 percent.
Of course, rental income or other investment properties may also be subject to rental income, which is not included in Savills’ amounts. But this data provides a simple comparable of asset price growth.
Borrowed money can cause profits… and losses
There’s a lot more to think about. Real estate is normally a ‘geared asset’, in the jargon of the sector, with returns boosted by borrowed money, namely mortgages.
For example, a £50,000 deposit on a £200,000 property, rising to £250,000, represents a £50,000 gain of 100 per cent, not a 25 per cent gain.
The same effect applies to losses, and of course mortgage costs have soared as the Bank of England has raised interest rates to combat inflation.
Then there is convenience. Real estate investing can be time-consuming as you deal with real estate agents, mortgage brokers, and self-filing tax forms. Investing in the stock market, especially if you only choose funds that track an index, is accessible and simple.
There will never be a clear answer in the real estate vs. stock market debate, but there should be a better understanding that real estate is not always a one-way street as Jimmy Osmond and others believe.
• Andrew Oxlade is a former This is Money editor and now works as a director Fidelity in personal investing.
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