I’m sure you’ve often wondered whether you should invest in property or the stock market and have heard arguments for and against from various sources – and perhaps are a bit conflicted about which will deliver you the better return on investment.
As someone who invests in and runs a property business, it will come as no surprise that I believe property to be the better choice. Let me explain why…
If we look at ‘like for like’ performance of the stock market versus the property market, the stock market has outperformed property 116% to 47% respectively.
As of August 2019 the FTSE 100 rose from 3,008 to 6,590 – which represents a rise of 113%; comparably the average UK property price went from £167,673 to £246,726 – a 47.1% increase*. However this doesn’t take into consideration the fact that you can leverage against property by putting down a small deposit and magnifying your return four-fold – using the bank’s money to do so!
No matter what you decide to invest in, it’s wise to keep in mind that you’re in this for the longer term as both investments are prone to some fluctuation. Typically shares are more influenced by industry-specific changes (e.g. energy shares could be affected by a change in legislation) and are more labile overall; property prices are more impacted on by location-specific developments (i.e. a new cross rail service could boost house prices in the area). Fortunately though, historically both have an upward trajectory over time.
FTSE 100 – 2010 – 2019
As a side note: if we drill down into data further we can see that properties in South-East England and London have seen the most growth and given the South-East is more affordable than London, this is where I do the bulk of my investments for my own portfolio and for my clients (for more insight into this topic read my article – 3 Reasons why London is a bad investment right now)
Why I invest in Property in South East England
The main reason I recommend you invest in property versus the stock market is that investing in property allows you to make money on borrowed money(otherwise known as ‘leveraging’).
Let’s use an example and make a few presumptions to illustrate how leveraging works:
- Property price: £100,000
- Deposit required: £25,000
- Mortgage: £75,000
- Interest rate: 2.6%
- Property value after 5 years: £150,000
Let’s say you had your property re-evaluated after five years and it’s now worth £150,000 – that’s 50% growth in Capital Gains – and a 100% return on your initial investment (the £25,000 deposit) and you’ve used the banks £75,000 loan to make this possible. By contrast to investing in stocks, there isn’t an equivalent opportunity – if you invested £25,000 in stocks, you would get a return only on that £25,000 and couldn’t leverage borrowing to drive bigger returns.
Of course there are always arguments that run counter to this that we should discuss, like:
Interest rates rising
Given the favourably low interest rates currently available I recommend that you fix your mortgage for five years and thus keep costs a known and static for the foreseeable future. However, in the event that interest rates were to rise, so too would rental income and accordingly you would still have a positive yield – especially given we would be factoring in 125-145% of mortgage repayment rates in order to secure you a buy-to-let mortgage, meaning we have a bit of wiggle room at the outset.
Falling property values
As touched on above, it is possible for property values to fall however the downturn will most likely be short-lived and property values should again bounce back as they have historically. The only exception to this is where a location-specific issue has arisen which is why I perform due diligence when purchasing to ensure that the properties I source have no known local issues that may impact negatively on future prices (say for example a prison that is to be built close by).
* According to UK Land Registry files
We are a property investment firm. Our publications do not offer property investment advice and nothing in them should be construed as investment advice. The information contained in our publications is not, and should not be read as, an offer or recommendation to buy or sell or a solicitation of an offer or recommendation to buy or sell.