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Should I invest in residential property or the global stockmarket?

01 October 2020

4 minute read

With interest rates close to zero and the recently announced changes to stamp duty, many investors will be considering the merits of investing in residential property. But, would you be better off considering a more diversified portfolio of assets? Here, we take a look at some of the factors to consider.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • The benefits of diversification
  • The risks and rewards of residential property versus shares
  • What history can tell us.

Diversification

When considering your investment strategy, one consideration is where in the world you wish to invest your money. With a range of lower cost investment options available, we can easily gain access to the world’s companies and governments, and with them the most productive ideas humanity has to offer.

Nevertheless, many investors still prefer to stay closer to home, and the FTSE 100 – the UK stock market index of the 100 largest companies by value – is often quoted on the news as a key measure of market movement. Indeed, UK shares and bonds are still very popular with those of us who live in the UK. However, this tendency towards a ‘home bias’ can both limit your potential gains and increase your exposure to the political, economic and other risks that come with focusing purely on the UK. This is one area of clear inferiority for owning a residential house in the UK versus a globally diversified portfolio of shares, bonds and other assets.

It is also important to consider currency exposure. Investing overseas can be beneficial as it can provide the investor with exposure to a diversified set of currencies, which can help to protect against sterling weakness. On the flipside, however, if sterling gains in value, those overseas earnings will be worth less when translated back into sterling terms.

One practical example of this is economic diversification. Both residential property and global shares are inherently cyclical assets. This means they tend to do well when the economy is doing well, and vice versa. This should be expected since what drives their returns like the annual growth rate of earnings, known as ‘earnings growth’ (shares), property prices (property), and rental incomes (property) are closely linked to the overall economy. The difference lies in the concentration of economic risk. What this means is that investing in UK residential property will leave investors being mainly exposed to the ups and downs of the domestic economy. On the other hand, investing in the global stock market leads to this economic risk being spread out across different countries, thus leading to a lower level of risk overall. 

Considering risk and reward

For investors, the key to any investment decision is the potential risk and reward. The risk is an interesting point. For investors who look at their share or portfolio valuations on a daily basis and see fluctuations, the risk appears greater. This was considered in research1, where changes in individual house price movements were compared to a diversified portfolio of global shares. The research found that while overall the residential property market may appear less risky than shares, when considering individual properties these may actually be more risky compared on a similar basis to a diversified portfolio of global shares. The fact that you don’t value your house every day does not mean the valuation doesn’t move.

The various indices which measure performance of shares and residential property also report in different ways. While you see share movements in real time, property prices are typically reported on a monthly basis.

But one return figure for all shares and all residential property does not tell the whole story. This does not include transaction costs, stamp duty, service charges, maintenance and taxes. The net return to investors after tax can depend on individual circumstances and specific investments selected.

One advantage that residential property has over shares is that it’s easier to increase returns using borrowing. But this extra return also comes with having to make regular mortgage payments. So, the extra return doesn’t exactly come risk-free. Also, residential property investment does not come cheap. According to the Land Registry2, the average house price in the UK is £235,673 (as at May 2020).

Investment conclusion

Going back to our initial discussion, the challenge for investors is to retain the value of accumulated wealth by developing a portfolio of assets which will deliver long-term returns. 

While the research concludes that over the long run returns on housing and global shares look remarkably similar, there are different dynamics with each asset class, each with their own pros and cons. While property has the advantage of leverage (borrowing), it comes with less diversification.

Ultimately, the choice between residential property and shares doesn't have to be a mutually exclusive one. There are long periods in which one of them outperforms the other. The housing market of the 1990s and early 2000s is a good example, when easier access to borrowing, financial deregulation and falling interest rates3 helped fuel a housing boom. When that ended with the Great Financial Crisis, global stock markets went on to outperform for the next ten years, led mainly by the US tech sector, although again past performance is not a reliable indicator of future performance.

Knowing which one will outperform the next decade is no easy feat – the future is unknown. To meet the challenge of building a robust and diversified portfolio, it’s wise, if you can, to invest in both and avoid being overly concentrated in any one of them.

There is really only one way to invest in residential property and that is to buy a house (or flat) – either as your own primary residence or as a buy to let. There are no funds that invest in residential property and there are no exchange traded funds (ETFs) that track residential property indices. What this means for investors is that it is not possible to add a little bit of residential property into your portfolio as a means of diversification – it’s more a case of all or nothing.

To achieve your long-term goals requires balancing risk and reward. For this reason, we would always suggest taking a long-term diversified approach to investing. The Barclays Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Smart Investor offers a wide range of funds, and our Barclays Funds List may help you to narrow down the wide range available to invest in. These funds are selected by Barclays investment specialists and, based on our research, they’re the funds that have built solid reputations and established sound investment processes.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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