Do you have too much faith in property? Is another property price crash in Dubai just around the corner?
The asset that’s thrashed house prices for growth
Ex-pats, it seems, are obsessed with house prices, but is their obsession misplaced? We were crazy about house prices in the 1980s, when values shot through the roof. And when they crashed in the early 1990s, everybody went crazy again, only in a different way.
Our mania reached a peak in the run-up to the financial crisis, when house prices soared to previously unseen heights. Incredibly, five years later, prices are higher still. UK Government figures put the average house price in the UK at £250,000. In London, that figure leaps to £450,000, an incredible 20% higher than before the credit crunch in 2008. For many Britons, owning a home is the only way to build serious wealth. By contrast, many remain sceptical about stock markets. They remember Black Monday, 1987, when markets crashed, and recession followed. They saw the FTSE 100 lose half its value at the height of the credit crunch, and didn’t like it. Yet here is the astonishing thing. Over the last decade, stock markets have delivered a higher return than house prices. A far higher return.
Stocks and mortar
I have analysed data from the Halifax, which has records on property prices in the UK going back more than 30 years. In February 2009, at the height of the financial crisis, the average UK property cost £160,164, according to its methodology. Five years later, in February this year, it cost £179,872. That is a little over 12% higher. Over the same period, the benchmark FTSE 100 index has delivered a total return of a whopping 103%, including growth and dividends, according to figures from S&P Capital IQ.
The stock market wins over 10 years as well. In February 2004, the average UK property cost £148,497, according to Halifax. Today’s £179,872 figure is just 21% higher. Over the same period, the FTSE 100 delivered a total return of 110%. That is despite losing half its value during the financial crisis!
Never underestimate the dividend
So yes, stock markets do crash. But their recovery powers are enormous. Better still, shares give you something your home never will. Major FTSE 100 companies pay regular dividends to investors as a ‘thank you’ for holding their stock. Right now, the FTSE 100 offers an average dividend yield of just over 3.5% a year. If you re-invest that dividend for growth, year after year, your money will grow in value even if stock markets remain flat during that period. Over the longer run, dividends account for roughly 40% of the profits you make from stocks and shares.
You don’t get a dividend from owning a property. But you get plenty of expenses, such as the cost of doing it up, and repairs and maintenance.
Climb on the stock market ladder
In an ideal world, you would hold both property and shares. But if you’re one of the growing number of people who believe they can never build personal wealth, because they can’t get on the property ladder, don’t despair. There is another way. And over the past 10 years, it has been far more rewarding.
Better still, you don’t have to be rich to invest in stocks and shares. You can save regularly into funds (which typically invest in between 40 to 100 shares in a particular class, so as to spread the risk of owning shares directly) from as little as $300 per month.