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Property vs shares: ten reasons why houses are often the better investment

This article looks at property vs shares from the perspective of the typical man or woman in the (overpriced) street. It does not argue buying a house right now is better than buying shares – or vice versa. But rather: why do people tend to feel they’ve done well buying their own property? Compared to their poor attempts at share investing?

Trying to weigh up the merits of property vs shares is a right of passage for anyone who gets into investing.

Most of us have limits on our capital and income. Even more so in our late 20s and 30s when – traditionally – buying your first home was a right of passage.

Of course, three decades of rampant house price growth have made that aspiration a fanciful dream for many young people.

This includes even those with above-average wages and few outgoings, unless they also get a cash windfall. (Typically a hefty contribution from their parents).

But isn’t the language telling? That we still routinely call property ownership a ‘dream’?

Despite our best efforts at Monevator, nobody talks about their dream of opening a shares ISA [1] or contributing to a SIPP.

Everyone’s an estate agent

I used to have arguments all the time about the merits of property vs shares as an investment [2].

This was in my 20s and 30s. Before UK property became so expensive that it made the choice moot for so many. Before the minority of young people who could buy tended not to discuss it, much as if their family had made their money from porn.

A succession of girlfriends thought I was crazy not to buy my own home and told me so.

Some (probably rightly) concluded I had commitment issues. But others thought I was just crap with money.

The latter had a point, too.

We’d seen London house prices shoot up for years by then. Multiple friends who’d bought in the mid-to-late 1990s had earned astonishing multiples on the small deposits they’d put down.

By 2003 it was already common to have a work colleague – who earned the same as you – sitting on a chunky six-figures of housing equity. Most of it conjured out of the property boom in fewer than half-a-dozen years.

But I hadn’t bought. And I didn’t for many more years to come.

Instead, I stuck to the view that London property was over-priced by traditional metrics for all but a brief period after the financial crisis. (And in that moment no bank would give me the money to buy anyway.)

Even when I eventually bought my flat [3] in 2018, I still thought London property was over-pricey.

More than anything though I just wanted to change the channel after literally decades of debate, sitting out the market, and seeing prices go up and up.

It’s no wonder that faith in property is almost irrationally strong. The most straightforward take has been well-rewarded.

I remember watching a BBC documentary on the Spanish real estate crash in 2012 with a living, breathing Spaniard.

After my friend had chortled her way through this tale of a property boom in Spain built on over-lending, over-construction, and over-confidence that prices would always go up, she said London was different because: “prices will always go up”.

Pass me the Rioja, I sighed.

Ten years on, she is still right.

Home ownership works well for most

Here’s what I wrote in 2012 when I first told this anecdote:

The truth is my friend will probably do fine, despite her sketchy knowledge of London’s booms and busts.

She’s going to buy her first flat soon, and if the price later falls, she’ll sit through it, and get on with life.

By contrast, I am an expert on London property prices.

Yet I managed to opt out of the entire boom and then failed to capitalise in the recent bust.

My friend’s first flat became her buy-to-let [4]. While the rental income ticks in, she lives elsewhere in a home she bought a couple of years ago with her now-husband. For his part he brought a ton of 1990s-earned housing equity to the picture.

Their story is far from unusual. So why do houses seem to be a bombproof investment for most people?

One reason is that even after a slump, only recent purchasers are underwater. Most people buy and hold their own homes for many years or even decades.

This means that at any one time, most people you know – especially older family members – will be okay because they bought a long time ago.

The vast majority therefore only have good things to say about home ownership.

Contrast this resilience with how people talk about shares after even a brief downturn [5].

Property vs shares: real-life utility

Another semi-psychological reason why property usually appears to be a good investment is because a house that is worth, say, 20% less than you paid for it still does its job as a house.

In reality it was a poorly timed investment – it slumped in value.

But we tend not to think of our homes that way [6].

Very different to shares – especially direct stockpicking as opposed to index funds, which is arguably closer to buying a single (undiversified) home.

Almost everybody I know who has dabbled in stock picking soon swore off it. They lost money and wondered what the point was of trading numbers on a screen.

Those in funds – passive or active – have done much better. But you still rarely hear them singing the praises of the stock market.

In contrast, those who buy a home put up paintings, hold parties, maybe get a dog. They live and breathe their investment. You never see them go back to renting.

This again makes property a clear favourite for most people. Their attachment to their home means they would never entertain the case for renting versus buying [7].

Do shares get any more respect in 2022?

When I last looked at property vs shares in 2012, the stock market was just recovering from a massive crash.

The financial crisis had recently tanked the markets. That crash came fewer than ten years on from the dotcom crash, which had done similar damage via a remorseless multi-year bear market [8].

In fact the 1990s was the last time most UK share investors could remember getting rich.

No wonder people favoured property versus ‘punting’ on the stock market. No wonder the buy-to-let boom.

In 2022 though shouldn’t the situation be a bit different?

While property prices have marched on since 2012, stock markets have done even better. Shares soon shrugged off the Covid crash [9] in 2020. And they went bananas after that.

The first six-months of this year has been hard, for sure. But the average UK passive investor still isn’t hurting too much. At least not if they’re invested in a global tracker fund, pumped up on currency-boosted gains.

And as I say, for the decade before all that portfolios soared [10].

You’d think as many people would now be giddy about getting into shares as property.

But I don’t get that sense at all.

What a difference a decade doesn’t make

The truth is it’s not just down to house prices versus share prices. Even when I last compared historical house price returns [11] to shares in 2012, I found it was roughly a draw.

And I don’t think superior numbers for equities since then would change much.

It’s hard to compare these two investments fairly. Everything from taxes to financing to how much house you buy or what markets you track varies widely.

Nevertheless, I bet you know far more people who say they’ve done great owning their own home over the past 20-30 years compared to any who boast about their stock market prowess.

I suppose enthusiasm for investing did flare in lockdown, and went crazy in early 2021 [12].

But that euphoria proved short-lived.

Indeed the whole rise and fall of making overnight riches on so-called meme stocks and cryptocoins is emblematic of why property wins out for most people, in practice. Even if it shouldn’t when you run the numbers [13].1 [14]

It all comes down to attitude.

Reasons why people invest better in property vs shares

Most of us treat our home purchases very differently to how we approach investing in shares. There are lessons in that for us as investors, as well as homeowners.

Here are ten reasons why property has been a better investment than shares for most people.

1. Owning a home is nearly always a long-term investment

When someone buys a house, they’re usually thinking they’ll live in it for years. They commit to being on the property ladder and paying down a mortgage for decades.

With shares, many people ask what will go up in price next week. Even those who pay lip service to the long-term can panic at the first sign of trouble.

2. We’re very choosy about what house we buy

I’ve seen many people put thousands of pounds into a company’s shares because of an article in Investor’s Chronicle, a new product they’ve seen at John Lewis, or even a tip from Twitter.

In contrast, people routinely burn through weekends and shoe leather visiting dozens of properties before finally plumping for one. That’s on top of countless hours researching via websites.

If only they took as much time on their investing knowledge [15].

3. We’re all experts in houses

Try this word association game:

It’s easy to see which is the most accessible.

From our earliest memories, we live in houses, we see refurbishments being made, and we find our bedroom too small.

We understand property by the time we’re teenagers in a way that only young Warren Buffett [16] understood business.

4. You can leverage up your property investment

Now we’re getting to the hard stuff!

A bank will lend you £400,000 to buy a house at an interest rate that even in normal times is just a smidgeon above inflation.

Indeed at the time of writing – with inflation at around 10% – the cost of a mortgage [17] is effectively deeply negative in real terms.

Just try getting the same deal from HSBC to buy a high-yield share portfolio – despite the fact that the dividends would equally cover the repayments.

‘Leveraging up’ like this makes a massive difference.

Yes I know houses are more work and need maintenance, interest is a cost, and whatnot. The point still stands. Taking on debt usually multiplies the return from home ownership several times over.

Most of us don’t work at hedge funds. We will never get access to cheap debt to gear up our stock market investments like we can with property, even if it was advisable. (It isn’t [18]!)

5. There are no margin calls on mortgages

I covered this in my article on borrowing to invest [13] via a mortgage. The executive summary is that mortgages are about the only sane way of borrowing to invest.

Why? For one thing, the bank won’t make a margin call on your mortgage. This means that if you buy a house with a 20% deposit and the price falls 20%, the bank won’t ask you to find another £50,000.

That’s in sharp contrast to say a spreadbetting account, where you’d need to stump up more money or be forced to close out your investment.

And for another thing…

6. Your house’s price is not marked-to-market [19]

Not only are there no margin calls with property – unless you have reason to remortgage, you don’t even need to know what your house is worth.

Compare that to shares. If you buy Tesco shares this morning, by lunchtime you’ll know if you’re in profit or not. By next Tuesday you might have been scared out of your investment, or else tempted to sell for a quick gain.

I’ve lost count of the friends who’ve told me after buying a house that they don’t care what happens to house prices next. But I believe they would care if a man turned up every afternoon to tell them exactly what their house was worth that day. (Let alone every second, as you get with shares).

Blissful ignorance leaves them free to ignore volatility [20] in house prices. This makes it easier to hold onto their investment.

7. Property is illiquid

Illiquidity is just a fancy word for something being costly and time-consuming to trade. And property being illiquid is another way homeowners are forced to be better investors.

Think about it. As if not knowing – and not needing to know – the price of your home wasn’t enough, selling a house is a complete pain in the conveyance. It’s so stressful it’s compared to getting mugged, divorced, or being diagnosed with a life-threatening disease.

Even if you do know what your house might be worth after checking on Zoopla, you’re not going sell on a whim.

Again, compare that to shares.

It’s next Tuesday, and your Tesco shares are down 3%. You panic and press the sell button. Job done, and the loss is locked in.

The liquidity of shares is one of their most attractive qualities, but it’s a double-edged sword for most.

8. You can add value as a homeowner

I sometimes tried to encourage my dad to put his talents to work at weekends to make a bit of extra spending money, or to save more for a rainy day.

He told me that after 40 hours at the office, the last thing he wanted to think about come Friday night was more work.

Yet my dad [21] thought nothing of spending 12 hours on Saturday doing various DIY jobs around the house.

It was all unpaid labour that kept his investment sweet. But he didn’t see it that way.

9. Owning and living in your own home is very tax efficient

The biggest tax break available in the UK is probably the fact you’re not liable for capital gains tax [22] on your own home.

Many people don’t even realise they’re getting a tax break [23]. They just accept it as obviously true and they say it’s anyway redundant (inevitable quote: “We’ve all got to live somewhere”) but in reality it’s a massive advantage.

If you buy a home while I instead rent and try to build a war chest, after 30 or 40 years I could easily be paying tax on my investments unless I’ve been careful and maxed out my ISA [24] and SIPP [25] contributions from the start.

Whereas your unrealised gains are all tax-free.

Should you downsize to a smaller property for retirement, the profit you realise is completely untaxed.

And there’s more!

You get a second tax benefit by living in your own home. As the property owner you’re effectively your own landlord [26], yet you don’t have to pay tax on the ‘earnings’ you generate from your tenant (yourself) whereas if you were renting your house to others, you would.

People get very confused about this concept. But trust me, this is what is going on when you buy your own home.

You are ‘consuming’ housing services. (The technical term is imputed rent [27]).

10. Property is a real asset

As a real asset, property has the ability to rise in price with inflation [28]. Anyone over 40 might have noticed how inflation to a large extent paid off their parents’ mortgage.

Shares have the ability to respond to inflation [29], too, but it’s a bumpier ride.

Besides the favoured investment of the masses is cash in the bank. And that’s about as useful in an inflationary environment as a bag of kippers with a hole in the bottom.

If the Baby Boomers hadn’t owned their homes throughout the inflationary 1970s and 1980s, they wouldn’t have the lion’s share of the country’s wealth today.

Houses versus shares: Final verdict

Anyone who has spent more than five minutes on Monevator knows I’m a committed equity investor.

My first love will always be the stock market.

Also, as I’ve acknowledge a couple of times above, there are plenty of caveats you need to make in a truly fair fight between houses and shares as investments.

So don’t take this post as a rallying cry to dump your shares for a bigger house and a second garage. Diversification is financially prudent in all things, except perhaps spouses (too expensive).

Buying your own home AND investing in shares for long-term financial freedom is the best route for most of us to take.

However it’s worth thinking about how well your grandfather might have done from the stock market if he’d been willing and able to:

Oh, and get all his returns tax-free…

Appendix: A perspective on property vs shares, ten years on

I updated this article in July 2022, roughly ten years after it was first published. A reader back then even asked me in the comments below to do so.

Precisely comparing the returns from property vs shares over this time would be another article, and this one is already extremely long. 

It would be complicated, too, due to the very real extra costs of buying and owning property vs shares, and conversely the varying boost from financing through a mortgage.

But as I said when this (controversial) piece was first published and I reiterated in my introduction today, this article was never about predicting future investment returns.

For the record, here’s a graph of UK houses since I wrote the piece in 2012:

[30]

Source: Financial Times [31]

Very nice if you happened to own a home!

However a global tracker fund would be up even more. It would have more than doubled for a UK investor, with returns accelerated by the collapse in the pound since the Referendum days.

Set against that, as I say most home buyers’s returns would have been amplified by leverage from their mortgage.

Either way it’s pretty obvious that predictions of a house price collapse made in the comments in 2012 were wide of the mark.

On the contrary, yet another generation of British property buyers has done well from home owning.

Feel free to again tell us in the comments below why that’s finally about to change. Perhaps due to rising interest rates or lower immigration post-Brexit or whatever your pet theory is.

Been there, done that, got the T-shirt.

Snakes and property ladders

It’s certainly possible that – as with bonds in 2022 – the bell will at last toll for UK property prices after an eternity of false alarms.

Nothing can go up forever. Can it?

But as we all indeed must live somewhere – and if you rent you are effectively buying a property, only you’re doing so for your landlord who is probably making a profit – I expect that over the long-term buying today still won’t prove a bad move.

Even if the question of property vs shares has a different answer.

Time will tell!

See you in 2032.

  1. That article compares paying off a mortgage to investing, which is not the same thing as property vs shares. It’s about financing choices. But it’s still maths worth doing! [ [34]]