Shares beat property in profits race

House prices have nearly quadrupled in real terms over the past half century, with the strongest growth seen in the past decade, says a study published by Halifax last week.
However, shares have performed even better than property if dividends are included, which will have implications for millions of people relying on their homes to fund their retirement.
In 1959, the average house cost £2,507 (about £43,000 in today’s money), compared with £162,085 in 2009 — a rise of 273% after inflation or an average annual real return of 2.7%, according to Halifax.
By contrast, shares have returned 1,180% after inflation over the past 50 years, giving an average annual real return of 5.2%, according to Barclays Capital. It has been monitoring the performance of shares, gilts and cash for 110 years and will release its 2010 Equity Gilt Study next month.
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These figures include dividends. Without them, shares are up only 86%, or 1.2% a year, according to Halifax, underlining the importance of reinvesting dividend income.
The Halifax study also shows that housing has been extremely volatile, with the strong returns of the past 10 years giving homeowners an inflated impression of what property can achieve.
Average annual returns were about 3% in the 1960s and 1970s, when prices rose by 36% and 34% respectively. They then shot up to 4.9% a year during the 1980s, or by 61% overall.
Recession took its toll in the next decade, however, with prices dropping by an average 2.4% (or a total decline of 22%), before surging 62% between 1999 and 2009, or an average of 5% a year.
Halifax said it does not expect prices to rise significantly in the near future.
Suren Thiru, housing economist at Lloyds Banking Group, which owns Halifax, said: “The prospects for the market this year will depend on how the UK economy evolves and whether there is a significant increase in the supply of properties for sale. Overall, our current view is that house prices will be flat during 2010.”
We look at the relative merits of property versus shares.
The outlook
While property prices surged between 1999 and 2009, it was a lost decade for shares. The FTSE 100 hit 6,930 on December 30, 1999, and has failed to regain that level, closing at 5,413 at the end of 2009 and 5,303 on Friday.
The FTSE All-Share fell by an average of 4.4% a year over the decade, after inflation, or a drop of 1.2% including dividends, according to Halifax.
After such an unusually poor performance — shares generally have a 92% chance of beating cash over 10 years, according to Barclays — many experts think the tide could turn over the next decade.
Jason Butler at Bloomsbury Financial Planning said: “Equities have a much higher expected return and higher probability of achieving it over the long term [more than 20 years] than residential property because shares reflect growth in the overall economy through profits generated by business, whereas property reflects only part of the economy.”
The difficulty of downsizing
The poor outlook for property will worry those who, perhaps disillusioned with pensions and stock markets, have been hoping that their homes would provide the capital needed to support them in old age.
This year is the 65th anniversary of the end of the second world war, and the first of the baby boomers are on the verge of taking retirement.
Many have done extremely well from their properties and believed they would downsize to produce a retirement fund. Many may now find it hard to sell those properties if they prove to be too expensive for the next generation.
According to calculations from Standard Life, the insurer, downsizing from the average semi-detached home in early 2008, valued at £343,058, to the average bungalow, valued at £118,260, would have released a fund of £224,798. This, after allowing for the cost of moving house, would buy an annuity income of about £100 a week, or £5,200 a year.
Today, the average semi is worth only £279,016, while the average bungalow has risen in price (largely because of demand from people downsizing) and is now £185,506.
This would give a fund of only £93,510, which would buy annuity income of just £68 a week or £3,536 a year — £1,664 a year less than two years ago.
Annuity rates are unlikely to rise for the foreseeable future as people are expected to live much longer in retirement.
Mark Dampier at Hargreaves Lansdown, the adviser, said: “We’ve got the baby boomers about to retire who expect to start selling their properties to generate a pension. But who is going to afford to buy all these expensive houses?”
Andrew Tully at Standard Life, added: “Property can be a valuable part of any portfolio but relying on downsizing your home is unlikely to generate the income you expect. You need to consider diversifying your investments and maxi-mising tax-efficient options such as Isas.”
The benefit of owning shares and bonds is that they are very easy to sell — a house can take months or years to get rid of.
Butler said: “Compared with liquid equities, property is easy to get into but harder to get out of, expensive to maintain and at the mercy of tenants paying rent. If you have time on your hands, great, but if not go for equities.”
It is also easy to make stock market volatility work in your favour by drip-feeding your savings into the market — more affordable for people on a monthly salary — because of what is known as “pound-cost averaging”.
For example, you want to invest £100 a month into shares. In month one, you buy 100 shares costing £1 each. In month two, the share price has halved to 50p, so your £100 buys 200 shares. In month three, the price returns to £1 a share. You now have 300 shares for the price of 200.
The benefits of a balanced portfolio
Shares may have many benefits but countless investors will still prefer property.
“Residential property is tangible and equities are not,” said Butler. “For those investors who have a low tolerance to losing control, property is probably always going to be an option.” Make sure you have a balanced portfolio of shares, bonds and cash, though.
Dampier recommended Artemis Strategic Assets, which is run by William Littlewood; Jupiter Absolute Return, run by Philip Gibbs; and Neil Woodford’s Income funds at Invesco.