Since the first house was sold, and the first stock was traded, people have debated which is the better investment: stocks or houses. House Prices are argued to be reliable, with very notable and shocking exception, but stocks are seen to have bigger returns. But which has done better over the years?
Lessons from History
Generally, it has been proved that from 1955 to now, housing can be seen as having outperformed stocks as the average UK house has gone from 30 times the FTSE All-Share, to being 50 times the FTSE All-Share. But, that is only relevant if you invested in property and only property in 1955, while a friend invested in stocks and only stocks in 1955, and then you both sat on it for over 60 years. In that case, you would now be the richer, of two very rich people. Investments are usually faster paced than that, with buying and selling of both stocks and property happening all the time.
In fact, if you were to travel back in time and use this knowledge to orchestrate the biggest possible profit by 2017, you would need to swap between the two as advantageously as possible, rather than putting all your faith in one. This would mean you should invest in housing until the early 1970s, then switch to stocks, and back to property in the late 90s/early 2000s until the global financial crisis. You could even analyse it closer than that to know exactly, year-by-year, what the best investments would be.
The truth is, that it depends what moment in history you are in. Hindsight is 20:20, but at different times in history, both have had the advantage over the other. But, what about now? What should we be investing in today?
Lessons for the Future
After the financial crisis, UK houses were 75 times the level of the All-Share Index. But, since then, stocks have exploded and pushed this number down to 51. All-in-all, housing has underperformed. This leads us to believe the safest bet is to believe that this will continue. Stocks are set to continue to outperform housing, and, as such, they are the safest bet.
However, the argument against this is the historical significance of the ’50 times’ ratio level. This interesting level has often been a turning point in this age-old battle between houses and stocks. The risk-taker may see this as a sign and want to begin divesting into houses if they believe in this turning point. If they are right, and it is true, in ten years or so housing could overtake stocks once again.
But this is not the most sensible advice. Many numerical patterns such as this have been proven time and time again to be false indicators in the financial world. If they worked, then all our lives would be much much simpler. Believing in them can actually be quite dangerous, and crises have been triggered by less. Ultimately, currently the housing crisis and the unaffordability of housing in general makes it unlikely that housing will begin to outstrip stocks as a worthy investment any time soon.
There is an argument to be made for a certain amount of stagnation or plateau for both of these indexes, however, as it is not seen as very likely that the ratio level will deplete significantly more than 50.
There is an exception: London. London property prices are currently insane, as I am sure you know. They are vastly overpriced and this has led to property beating the All-Share unequivocally by a shocking 120 times. However, until recently, they were at 140. This slight fall is likely to be due to the London housing crisis reaching the upper most limits of madness. If house prices continue in this manner, even Russian Oligarchs will no longer want to live in the capital.
But slowing growth, is not the same as lowering prices, and there is no real immediate reason for house prices in London to fall. It is likely that a plateau in growth will slowly lower the ratio, but not immediately benefit stocks. It is also important to remember that a dramatic crash in housing in a city such as London, is likely to also impact stocks.
This leads us to a very boring conclusion. Stocks will continue to beat housing, by and large. But not in any dramatic way, and London will continue to be a stagnating exception, where growth slows, but doesn’t recede.
Keep a weather eye on Threadneedle Street, however – a change in rates could change it all.