What’s best to invest in now – stocks or houses?

Where should you put your money? Stocks or property?

Which is the better investment?

In today’s Money Morning we settle the question once for all.

Sort of…

A look at house prices through the prism of share prices

I’m going to look at some simple ratios over various time frames between average UK house prices (as measured by the Nationwide), and the FTSE All-Share index.

I’m using the All-Share rather than the FTSE 100 because there are more companies listed, and they are more domestically focused. The FTSE 100 is heavily weighted to natural resources stocks, especially miners. Also roughly three quarters of FTSE 100 company revenue is made overseas, so it’s not the best gauge for our purposes here.

Comparing these two asset classes is notoriously difficult. Do we include rents and dividends? What about the capital gains tax (CGT) implications? Mortgages and leverage play a role – a 10% deposit and 90% mortgage means that the house only needs to go up by 10% for you to double your money. Unless spreadbetting or similar, people tend to be less levered when trading stocks. And so on.

For our comparison we assume no leverage and no mortgage, just a straight cash investment. We ignore CGT and other taxes. And we make the dodgy assumption that rents (or the utility of a house if you’re actually living in it) and dividends cancel each other.

Our starting point is 1955.

My thanks go to Nick Laird of GoldChartsRUs for cobbling together these charts. Here’s the first of them.

Chart of stocks vs house prices


The red line in the upper pane shows the ratio between the average UK house price (according to Nationwide), and the FTSE All-Share index. When the red line is rising, housing is outperforming stocks. When it is falling, stocks are outperforming houses.

The black line in the second pane shows the average UK house price. The blue line at the bottom shows the All-Share.

Both asset classes have done well, of course, extremely well – it’s why Baby Boomers are so loaded. But whereas in 1955 the average UK house was 30 times the FTSE All-Share, it’s now 50 times, give or take.

Housing has outperformed stocks, in other words.

However, if you were really smart, and could invest with the clarity of hindsight, while avoiding CGT, then in around 1970 you would have switched into property and remained there till 1975. Property vastly outperformed stocks in the early 1970s – more than at any time in recent history – with the ratio hitting 150.

We might attach the huge outperformance to the oil price shock and inflation, but surely the biggest factor was the Bank of England’s deregulation of the mortgage market. This allowed high street banks  – no longer just building societies – to lend. All that newly-created money poured into the housing market and dramatically pushed up prices.

In 1975, you would have then gone into stocks and stayed there until 2000 – perhaps flipping in and out a couple of times, if you were really smart (and unhindered by taxes, transaction costs and timing issues).

You can see the huge boom in stocks with the disinflation of the 1980s and 90s, financial deregulation and so on.

Property was then the better investment from 2000 until 2009 – there were two major stockmarket crashes in this period. Since the global financial crisis (GFC), stocks have outperformed.

But what about now?

Let’s zoom in now and look at the last ten years.

By spring 2009, in the aftermath of the great financial crisis, the average UK house was 75 times the level of the All-Share index. House prices have crept up since then (in London the story is rather different), but stocks, of course, have been in a mega bull market.

As a result, today the average house (£210,495) is around 51 times the All-Share (4,134) – in other words, housing has underperformed stocks over this period. Now what’s interesting is that this ratio level – 50 times – has historically been a turning point. It meandered around this level in the 1980s as well as in 2013.

However, if I had to stick my neck out and say which is likely to outperform over the next 10 years, I would venture that stocks will. That is the direction of the current trend, and there are all sorts of hidden forces at work – the main one being unaffordability – which means there is a heavier lid on house prices than when the ratio has been at this level in the past.

Equally, the long-term low of 20 times, such as we saw in the late 50s, 60s and 90s, looks unlikely but you never know.

As usual, London is the exception

As a man with the typical Ptolemaic view of a Londoner, I should also show London prices, which tell a rather different story.

The data for London goes back to 1995.

Chart of stocks vs house prices

London property has beaten the All-Share hands down – with the ratio rising from under 40 times in the late 90s to around 120 times today. The long-term trend is clearly up.

However, it’s worth noting that as London prices have stalled over the last couple of years, the ratio came down from 140 to 120. It’s still absurdly high. While I am not as bearish on property as some, neither am I particularly bullish, so my forecast would be for that ratio to come down further, perhaps even below 100. Higher interest rates would do the trick, but that is another issue in itself.

For it to go back to 1990s levels, though, something fairly monumental would have to happen – rates at 7% or 8% or something. Mind you, that might crucify stocks as well (which clearly means the ratio wouldn’t necessarily fall particularly hard and might even rise, depending on which asset was hit harder by rate hikes).

Such a day seems a long way from here in the gutter at 0.25%, where even the idea of a quarter-point rise is a major issue. But one day it will happen. Perhaps the long overdue crisis in the government bond market will be the cause.

So sometimes housing beats stocks, and sometimes it’s the other way round. In the current trend stocks are outperforming. Obviously, each individual stock or house is its own case in point, but my prognosis for now is that the trend will continue and stocks will beat houses over the next few years.

  • DemiSapien

    With rates at 7-8%, government borrowing costs would be so high they would be likely to default. Or guess what get punitive on the taxpayers and hunt for money everywhere…Oh that is already well underway…more of it – yuck. These things always take time to unfold, but with macro picture is clear: wealth to private, stocks up, government bond crash, house price values will remain flat, but up as GBP number, rates will be higher.

    • Horiboyable .

      If we default, it is risk on and interest rates will become eye watering. Liquidity will dry up and you will not sell your home for a few pieces of silver. I estimate that housing will be down 50% after all this witchcraft from CB’s.

      Throughout history, the hallmark of a collapsing society is when they debase their own currency. All this money printing has distorted the markets so much with false signals you had better be a prepper.

  • Ben Stubbens

    your first two graphs are the same (i.e. starting in 2007). think the first one should be a longer timescale

    • Gah, sorry about that. I’ve updated it with the correct chart.

  • Interesting charts. There is so much different between the markets – one liquid, one illiquid; one investment-driven, one utility-driven etc.I don’t know whether valuation ratios really have the same meaning as, e.g. one FTSE sector vs another.

    Also concerned that because FTSE100 is something like 85% of FTSE All-Share the critique of FTSE100 applies almost as much to the FTSE AllShare.

    I constructed an index once with companies with 50% or more revenue from the UK. The largest constituent was Tesco, at the time number 11 in the FTSE. Both indices are driven by the top 10 UK companies, all of which have less than 50% UK revenues.

  • Alex Jackson

    Ignoring rent and dividends? Then ignoring rather a massively important factor. Also, if you’d bought a house in 1965, how much money would have needed to be spend on maintenance, decoration, refitting kitchens, bathrooms, roofs, electrics, plumbing, heating, windows, gardens etc. What comparable metric is there for shares to balance out all of that?

    • if you were going to do a property investment over 50 years (without rent) you would immediately demolish the house or just buy a plot with implicit planning permission. The investment is in the land capital, the thing that is going up in value. The only value the house capital has is its ability to produce rent. The house is like a machine in a factory, it can produce stuff but has running costs and eventually is scrapped.

      Also maybe 50% of stock investments ARE property investments so this is a comparison of a pure property investment versus a ‘property plus other capital’ investment. I would expect the pure property investment (just stick a straw in the economy and suck value) to win over the long term versus plc business profits.

  • Horiboyable .

    Folks let me announce that we are screwed. The west is in the process of collapse, every country is indebted so much they will never pay it back and will eventually default on their sovereign debt like they did in 1931/2. Yes, even Germany, they are a pay as you go nation PAYG. Merkel trying to save the day is letting in millions of murderous Muslims to turn them into culturless drones to pay for all the pensions the German citizen has been promised.

    Same here in the UK with the STATES advertising about, “I’m In”. Really, I have been working for 40 years and I have always been in, that was the social contract. So you have spent MY pension contributions and you want me to put in AGAIN. Well if you have stolen my first pension what is stopping you from stealing my second? So now we understand why Blair let in so many Eastern Europeans! Before you call me racist let me declare that I am married to one and understand their ethos.

    Let me say this, the state is broke and we are entering a period of tyranny. Throughout history when the state finds themselves in this position they will ALWAYS turn on their own citizens. I have always been prepared for this eventuality and knew from a very young age that I need to be a multiple passport owner, good luck and be kind to your neighbor because you will need them.

    Be kind to each other.

    • Peter Edwards

      “letting in millions of murderous Muslims” You need to tone that right down.

      Demographics are bad for the economy going forward in the West however I see it as a good thing.

      Never in human history has society been so stable as to have such a high proportion of over 60’s in it ranks.

      Also I think we may be able to generate the wealth so that they don’t have to live on bake beans, It will mean the end of free market capitalism as you know it but getting there will be very dramatic.

      As for the topic Long Term Shares, Short term / Medium term is anyone’s guess

  • Karl Crompton

    From the information in the article, all that can be compared is the purchase price of a house or a FTSE tracker trust.

    There is not enough information to compare the investment performace of the two options.

    If you purchased an average modern house in 1955 you could not sell it for the price of an average modern house today. Additionally, over the 60 years, you would have spent much of the rent replacing multiple boilers, redecorating every 25 years and other expensive upgrades and repairs. Not to mention that the house is half way to needing to be buildozed and rebuilt using the remainder of the rental income.

    Where as a FTSE tracker with income reinvested at little cost will the fully paid off house out of the water.
    Even with allot of debt leveraging, the mortgage interest will chew up much of the gains in exchange for elevated risk.

  • how can you write something like this without talking about the Homer Hoyt / Fred Harrison 18 year mortgage credit / property price cycle ? Or geo-Austrian business cycle theory? i.e. models that have correctly predicted house price booms based on shifts in bank lending away from business investments and into mortgages over an 18 cycle driven by rates averaging around 5%.