FTSE vs. property: which performs best over the longer term?
12:13, 16 March 2022
The phrase ‘as safe as houses’ is often bandied about, giving the perception that investing in property is a sure bet. Most stock markets had a bumper year in 2021 but, despite this, the UK property market still managed to beat equities on growth.
House prices across the United Kingdom rose by 10.8% in the last 12 months according to figures highlighted by the UK Property Investor Show from the Government’s Housing Market Index.
During the same period, the FTSE 100 Index of leading shares increased 9.6%. Meanwhile, the FTSE 250 decreased by 4.79%.
Is this the only realistic measure of performance? And does the property market always outperform the stock market long term?
Devolved nations vs. worldwide stock markets
The UK Property Investor Show also points out that England’s growth rate lagged Scotland and Wales. Scotland saw property prices rise by 11.2% while Wales enjoyed an increase of 13% in 2021.
But even England’s performance outperformed most worldwide stock markets during 2021. The US Nasdaq increased only 0.48%, the Dow Jones Industrial Average added 7.61% and France’s CAC 40 which rose by 9.19%.
However, property wasn’t the best performer overall. The US S&P 500 gained 26.89% last year. But this doesn’t deter the supporters of property investing. Rob Stross, a marketing consultant at the Property Investor Show, told Show House magazine that Scotland was the only housing market that could compare to the S&P in “brute strength” terms.
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Pros and cons of property and stocks
Looking at property over the last 12 months and comparing it to stock market performance may not be fair play, some may argue, particularly given some of the unprecedented events we’ve had to endure.
Stock markets have been volatile thanks to the Covid-19 pandemic and the war on Ukraine has upset certain sectors of the market, which can skew the results over a short period of time.
While investing in property may seem robust, it’s certainly not fool proof and property price crashes in 1991 and again in 2008/2009 are testament to that. Also, if you consider the costs involved both at the start of investing in property – it’s a far bigger outlay to consider versus a basic stocks and shares ISA (individual savings account) which can be started with a £500 deposit or from as little as £25 a month.
Investors need to consider the large deposits and taxes needed for property purchases. In 2021 deposits on average came to £53,935 for the average first time buyer. Then there are the ongoing costs such as maintenance costs that can eat into any initial investment or gain that’s made.
No instant cash in property
So, while property prices may have gone up, can you claim not to be in the red if you subtract the liabilities? Another downside to property is that it can’t offer instant cash if you need the money in a hurry.
While you can get additional income through renting a property out (if you choose the buy to let option), there’s also void periods to factor in (when people aren’t renting).
Investing in stocks, meanwhile, can also offer income in other ways. Equity trader, Neil Smith, explains: “The stock market is very liquid and if you need to liquidate it’s very quick to do so, whereas a property transaction is weeks or months.
“If you’re reinvesting and compounding dividend income that can have a significant increase in the return over a decade’s horizon.”
Exposure to property
For those who don’t have the cash yet to invest in property but who still believe that bricks and mortar are a good investment, there are plenty of ways to access the housing market (both commercial and residential) through the stock markets or funds.
For instance, the UK’s Real Estate Investment Trust (REIT) sector consists of 59 companies with a combined market capitalisation of £55bn as of the end of June 2020. Investors in the FTSE 350 REIT would’ve seen their investments go up 21% in the last 12 months.
Smith adds: “You can make money investing in property stocks. If you look at British Land or Land Securities, they are very agile and creative and that’s just looking at the commercial side. Investors could have a mix and could split between commercial and residential builders as well as small sprinkling of the agency side by investing in the likes of Savills.”
Ultimately, investing in the stock market and in property can be done simultaneously and investors aren’t forced to make a choice between the two. This is probably a good thing given that higher mortgage rates are already affecting the demand for new homes.
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