When evaluating investing choices, the first thing to do is compare the return from its current earnings. To make a simple comparison, let’s look at the S&P500 for shares (or the stock market) and the UK price index for the property market.

There are two ways to compare:

What are the historic returns?

i.e.  How has it gone up over the last 50 years.

What is the current return based on the cash flow it provides?

i.e. If I buy at the current price, what return do I get on its earnings (or yield)?

The cash flow is an investment-based approach, whereas the historic returns are more speculative.

Property vs Shares: Comparing by historic returns

For the purpose of this example we will assume that income from share dividends and rental income is taxed at the same rate.

To get the total return figures, we need to add the price increase of the asset to any income it makes. Since 1952, UK property prices have appreciated 7.74% per year. The return on property is equal to the price appreciation plus the net income. The net income is equal to the rent, taking void periods in account, minus all costs including maintenance, fees etc. I am going to assume this is 3% per year to allow a good budget for maintenance (which is often overlooked and underestimated).

Property (UK Property Index)
Stock Market (S&P500)
10.74%
9.84%

The property return is 1952-2015 and the S&P500 is the total return average 1965-2014.

My gut feeling is that, during this period, shares would have beaten housing easily. One reason perhaps is that UK houses don’t generally disappear, whereas failing companies do.

Property vs. shares: Comparing by current yield

Here we need to compare the net income on property with the earnings the S&P500 makes. Some of the S&P500 earnings are retained and not paid out as dividends, but they still count as the earnings of the asset.

UK Property Net Yield 2015 (est)
S&P Earnings Yield 2015
3.05% (5.02% ex fees etc)
6.20%

The property figures again form a non-complete dataset via a report by HSBC. Again, for property we have to estimate what the net yield will be, and this time I am going to estimate that 2% of the property value is maintenance fees etc. to give the actual return.

From a current earnings viewpoint, the market is currently better value, even if we factor in zero fees.

Property and shares: the pros and cons

Pros
Cons
Property
Something you can touch and feel
Having something to look after
Regular work dealing with tenants and service providers
Unlikely to sell in a crash
Hard to sell in a hurry if in need of cash
Good long-term returns
Can go periods without any capital gain
Simple to understand
Harder to implement
Can use leverage for higher returns
Leverage can add wipe-out gains in down times
Good protection from inflation
Income isn’t sheltered from tax
Shares
Liquid, you can sell easily when you need cash
Easy to sell in times of panic
Can be bought in tax efficient structures such as ISAs and pensions
Easy to invest in via trackers or similar
Subject to sudden drops and gains
Good protection against inflation
Harder to understand than property

In shares in the stock market you can fire and forget, but for property you have to do some level of work. To do well in both, it’s important to take a measured long-term view and ride the storms. Property has the advantage here — when it goes down in value, you are less likely to sell it in a panic, as it isn’t as simple as selling a share on the market. The flip-side of this, of course, is that it’s also harder to sell property in a hurry if you need the cash. Personally I prefer shares, as I pick more specifically not just the whole market, plus there isn’t the hassle of owing property.

Datasources:

S&P Dataset

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

UK Total Return Dataset

http://www.nationwide.co.uk/about/house-price-index/download-data#xtab:uk-series

Disclaimer: The above does not constitute investment advice. The author has invested in the stock market and the property market at the time of writing.

Tim O'Shea
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Tim O'Shea

Fund Manager with 15 years' experience as a successful business owner-manager. Passionate about helping people benefit from the power of long-term investing.
Tim O'Shea
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