Is property a good investment?

Asset allocation is the process of deciding what type of asset to invest in. Before deciding upon an investment in a particular company, for instance, you must decide that companies in general are a good thing to invest in. Different countries have different tendencies when it comes to asset allocation. The Germans love bonds; the US invests in company shares; Indians love gold.

What about the United Kingdom? The asset which forms the highest single component of UK household wealth is property. This has made UK households richer over the last 40 years; property in many parts of the country has experienced significant growth above inflation. However, since 2022, higher interest rates and an increased tax burden have reduced returns.

It is not just the homes we live in; we also tend to focus on property for our excess capital, including for investment. This makes our rented housing sector distinctive. Small-scale landlords are much more common in this country than in either the US or Germany. As a result, many more people are landlords; the obverse of this is that many more people rent from small-scale landlords. A further knock-on effect is that property ownership is a more hotly disputed political territory in the UK. There was a sense of class and generational conflict embedded in the recent debates about rent regulation. The contrast with somewhere like Germany, where the political debate around property taxes is much more technocratic, is stark.

This sense of divisiveness in the UK has led property owners to experience an increasingly hostile tax environment. Higher-rate tax relief on mortgage interest was removed. Additional rates of stamp duty have been introduced. Some councils require landlords to have licenses. Most recently, this Labour government has increased the protections available to tenants and increased the rate of tax applicable to property income by 2% across the board.

The logic of this latter change is instructive. A basic rate taxpayer landlord pays a lower rate of tax than a basic rate taxpayer tenant on a salary. That’s because the landlord doesn’t pay National Insurance. This is viewed as unfair. The moral and behavioural logic of this is that the owner of the asset is less deserving because there is a less direct connection between their personal labour and the economic reward. The left-wing economist Thomas Picketty has described in detail the process by which our economic system drives wealth inequality by delivering higher returns to assets compared with wages. Influential ministers like Torsten Bell and Ed Miliband are fans.

But beyond the high-minded economic theory and the objectives of tax policy, there are important practical questions for individuals to consider. The first thing to say is that sometimes we are wedded to property because we are used to it. That creates momentum in our individual affairs, which can be hard to fight against. But a lot of people would achieve their financial goals more easily if they sold their excess property. One cannot fund a more expensive lifestyle by sustainably eating into capital if the whole lot needs to be sold at once. Estate planning also becomes more flexible. The investment strategy can be shifted if need be.  

Many maintain an investment property regardless of these factors. It can be successful. Ironically, one of the reasons for this is that property is so difficult to sell. Unlike financial assets, where investors have a tendency to sell when worried, selling a property is much harder. A drop in valuation doesn’t confront you unless you are hooked into a cycle of daily Rightmove checks. In short, owning property pushes you towards a buy-and-hold strategy, which is statistically a very successful way to invest.

One practical deterrent to property ownership is the difficulty of managing them and the people in them. Even if you have ridden the wave of property price accumulation in recent decades, holding those properties through to your dotage is not a good retirement income strategy. Property is inflexible, highly taxed and difficult to administer. People in their 70s quickly tire of having to pop round on Saturday morning to one of their flats to fix a showerhead or flip a fuse switch. One of the advantages that comes from being a financial planner is that you can see a broad swathe of timeframes simultaneously over the sweep of your clients. This allows us to give a kind of report from the future. While in your 50s, continued holding of property may seem obvious and manageable; by their 70s, most are looking to divest for better liquidity and less work. It is a very common pattern.

We have been comparing equities and property here, but I haven’t given much attention to which of the two delivers a higher overall return. This is a more difficult question than it is made to seem. Most organisations that provide data to try and answer it are partisan: they have a financial interest in one or the other. There are also some idiosyncratic features specific to the investor. Most notable is the amount of debt you take on. If the house price goes up, the property produces a good rental yield, your debt is cheap, and you only have to invest 30% of the initial value, you will likely do better than equities. But by the time the mortgage is paid off, capital sunk into a property would likely have a higher return if it achieved the long-term average equity rate of 7%.

If this sparks thoughts about your own situation and you’d appreciate a conversation, you can get in touch here.