ANYBODY interested in the housing market and in trying to preserve their wealth in these uncertain times should take a look at a fascinating new book. Safe as Houses: a Historical Analysis of Property Prices is full of useful facts – and a stark reminder that investing in residential property isn’t as sure a bet as most people believe. Author Neil Monnery has studied house prices over the long term around the world and confirms that – globally – they tend to grow at one per cent above the rate of inflation over very long periods of time.
In Britain, as the Barclays Equity Guilt Study points out, real house prices grew by 2.4 per cent a year between 1952-2010, against 6.9 per cent for equities. However, Monnery’s original and extremely important research shows that real house prices grew by just 1.3 per cent a year between 1900 and 2010 (and by just 0.8 per cent a year until 1995, before the bubble). In the US, real house prices grew by 0.2 per cent a year between 1900 and 2010; in Norway, they grew by 0.9 per cent a year during that same 110-year period; in Australia by 1.4 per cent a year. In Amsterdam, he finds that they grew by 0.6 per cent a year on average over the past 110 years; they only rose 0.4 per cent per year since 1628.
The book also contains much other useful data. There is a nonsensical myth that the UK has uniquely high levels of home ownership and that hardly anybody owns their own home on the continent, where a rental culture apparently prevails. Yet in 2009 the home ownership rate in Spain was 85 per cent, 78 per cent in Belgium, 77 per cent in Norway, 75 per cent in Ireland, 70 per cent in Australia, 69 per cent in the UK, 67 per cent in the US and Canada, a still pretty high 57 per cent in France and a lower but still very sizeable 43 per cent in Germany. Yes, the Germans are much less likely to own their own homes but in general the difference has been greatly exaggerated. Another myth is that all economies saw house price rises during the boom. Yet since 1990, they have trended down in Germany, Switzerland and Japan and stagnated in Italy and Finland, for example.
There are, of course, reasons why people may still prefer to invest in housing rather than in equities, even though long run real growth in bricks of mortar is far less impressive than usually understood. They can use leverage much more easily. Primary residences are exempt from capital gains. Returns to equity can be severely reduced if held using wealth managers who charge high fees. As Monnery points out, £100 earning four per cent in real terms will become £710 in 50 years, giving a gain of £610. Reduce that by paying two per cent fees and the gain falls to just £169. The answer may lie in low-cost tracker funds. Against this should be put the much higher than usually understood cost of buying and owning property. People spend thousands of pounds on their homes, yet forget that this cost should be deducted from capital gains, often wiping them out.
But for a full comparison, rents or the benefits of living in a home should also be included. One might assume a gross yield of 4 per cent and a net yield of 2.5 per cent after costs and expenses, which should be added to price appreciation to create a real and fair measure of return. Long-run, property provides good but not miraculous returns; short-term, more price declines are certain. Food for thought.
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