January 16, 2018

Property vs Shares – Why it’s time to invest in property

It seems as if the debate around whether it’s better to invest your money in property or shares will never end. Traditionally, the stock market was seen as a safe place to invest money. However, since the financial crash of 2008, many people have been wary of investing in stocks and shares during the protracted and slow recovery of the financial sector. Below is a guide to why now is the time to invest in property in the UK, rather than in shares.

Return on Investment

Between 2000 and 2016, the growth in the average value of a UK home significantly outpaced the value of the FTSE 100. Data from the Halifax which covers this period suggests that investing £100,000 in property created a return of 132%, whereas investing the same amount in the FTSE would only generate a return of 82%. If you enter the buy-to-let market, rental payments can be used to pay the mortgage, further increasing your return. As the house market is predicted to raise by 56% until 2027, it might worth looking at buying a property.

Low Rates and Leveraging

With interest rates at a record low, borrowing from banks is very cheap. This means that your lender could provide you will hundreds of thousands of pounds at an interest rate which is just above inflation. However, it is highly unlikely that a lender would provide you with the same deal if you wanted to invest the money in a portfolio of shares. The only people who can afford to borrow large sums of money for investment in the stock market are hedge funds, so you cannot leverage your investment.

Leveraging refers to borrowing money in order to increase your investment and your returns. If you were to invest £40,000 in the stock market and the shares eventually doubled in value, you would have made £40,000. However, you could have used that £40,000 to place a deposit on a house worth £200,000, borrowing the remaining £160,000. If the house then doubles in price to £400,000, you will have made £200,000 once you have paid off the mortgage.

Perfect and Imperfect Markets

The stock market is what is described as a ’perfect market’. The idea of a perfect market is that it always adjusts itself to reflect the true value of any item at any given time. Of course, the market isn’t truly perfect, as there are specialists working within the industry who have expert knowledge which gives them an edge. However, the average investor has the same information as everyone else, and can buy shares at the same price as everyone else.

Property investment is an imperfect market. When a market is imperfect, it means that items in the market can be bought and sold for prices which are higher or lower than their true value. For example, it is possible that a house which is actually worth £250,000 to be listed for sale for £240,000. If you choose to invest at below the market price, you are immediately locking in value to your property investment. The imperfect market can also work in your favour when you want to sell a property, as you can put your property on the market at a value which is higher than the average, and increase the return on your investment.

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If you want to know why property could be the perfect retirement investment, read our article here