Tom Francis, Head of Advice at Octopus Money, weighs in.
British people LOVE property.
More than anything.
We all plan to buy a property as quickly as we can, and the default for so many people with extra savings is to try to invest into bricks and mortar. Often this is because someone (often an older relative or friend) we know “made a killing” by just owning a property. We always hear the phrases, “property only goes up in value”, or “property isn’t going anywhere, it’s solid”. Some people also believe that “renting is just throwing money away.”
But this isn’t always the case.
Property can and does fall in value over different time periods. In 2008, the average UK property lost 15% of its value. The difference with property is that we don’t get it valued every month or year. We just live in it, and then check the value when we come to sell. If we see a headline about stock markets falling, we don’t go and get our house valued. But we might be tempted to sell our stocks and shares (at a loss).
This is one of the big differences between stocks and shares and property, where their value can be checked easily on a daily basis. You’ll often read dramatic headlines when something is happening in the stock market or the economy, and this might make you sell at a loss or think investing in the stock market is too risky.
In reality, it’s been estimated that annual returns on UK property equate to around 4.7%* per year, whereas the return on global shares is 5.3%** per year.
When we add to that the fact that you can withdraw money from stocks and shares as and when you please and you don’t need to cover the roof repairs when there is a leak, this makes stocks and shares a really attractive option for anyone who wants to focus on growing their wealth in the long term.
Pros of investing in property
- When you own your home outright it reduces your living costs later on in life.
- You can release equity from your home to fund your retirement.
- If your property increases in value you’ll make a profit if you sell.
- Depending on the housing market, location and interest rates, it might cost the same to make mortgage payments as it does to rent (or it could even be cheaper).
- You can pass property on as an inheritance to your loved ones when you die.
Cons of investing in property
- You’ll need to save up for a deposit, usually 10% of the property value.
- There are additional costs to buying – you’re paying for more than just the property. (Read more about the costs associated with getting a mortgage here.)
- You have to pay to maintain your home – if your boiler breaks, you have to pay for a new one.
- The increase in value of your home is not guaranteed.
- If you’ve only invested in property, your investments aren’t diversified.
- If you buy a flat you may have annual service charges and ground rent payments.
As with most things, financial or otherwise, every person’s situation will be different. Some people will value getting on the property ladder, and others will prefer the flexibility of renting. You’ll need to look at your numbers and your future goals to determine what’s right for you. Speaking with your money coach could be a great place to start if you’re feeling stuck.
And more importantly, there’s no reason why you have to pick one or the other. You can aim to own your dream home while also investing sensibly in the stock market.
* The Quarterly Journal of Economics: https://academic.oup.com/qje/article/134/3/1225/5435538
**Credit Suisse Yearbook 2021
***With investing your capital is at risk. Your investments may go down as well as up, and you may get back less than the amount you invested.
