Note to avoid more confusion: This article does not argue buying a house right now is a better decision than buying shares, or vice versa. It explores why people have tended to do very well buying their own property versus their poor attempts at stock market investing, and what we might learn from that.
About once a month I have an argument with someone – usually my girlfriend – about whether houses are a better investment  than shares.
Faith in property is almost irrationally strong. For instance, I happened to watch a BBC documentary on the Spanish real estate crash with a living, breathing Spaniard the other day.
After she’d chortled her way through this tale of a property boom built on over-lending, over-construction, and over-confidence that prices would only go up, she said London was different because: “prices will always go up”.
Pass me the Rioja!
Home ownership works well for most
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. (Mainly because it only lasted for about 3 days in 2009 and I think I was on holiday, but you get the point…)
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 much underwater since most people buy and hold their own homes for decades.
At any one time then, most people you know – especially older family members – will be okay because they bought a long time ago.
Another semi-psychological reason why property usually seems a good investment is because a house that is worth 20% less than you paid for it can still do 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.
Compare that to shares. Almost everybody I know who has dabbled in stock picking swore off it soon after. Those in funds have done better, but you rarely hear them singing the praises of the stock market.
For most people, property is the clear favourite.
Reasons why people invest better in property than shares
Obviously the rotten past decade for the stock markets hasn’t helped the case for shares. Lots of people thought they were geniuses back in 1999, when the FTSE 100 hit an all-time high and you could double your money overnight in the right tech stock. A couple of stock market crashes sorted that out.
But I think there is more to it.
It’s not just down to rises in house prices. When I last compared historical house price returns  to shares from 1984 to 2012, I found that it was roughly a draw.
Now I would agree with anyone who says it’s hard to compare these two asset classes fairly. Nevertheless, I’d bet you know far more people who have done better owning their own home over the past 30 years than who boast about their stock market investing prowess.
I believe it’s mainly down to attitude. Most of us treat our home purchases very differently to how we approach investing in shares. And 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 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 a bloke in the pub.
In contrast, people routinely burn through weekends and shoe leather visiting dozens of properties before finally plumping for one – and that’s on top of countless hours researching via websites.
If only they took as much time on their investing knowledge .
3. We’re all experts in houses
Try this word association game:
- Funds – TER, tracking error, CAGR, portfolio, asset allocation
- Shares – P/E, amortisation, dividend yield, volatility
- Property – Two bedrooms, kitchen, garden, rent
It’s not hard 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 the Warren Buffett’s  of the world understand business.
4. You can leverage up your property investment
Now we’re getting to the hard stuff!
A bank will lend you £200,000 to buy a house at an interest rate that’s just a smidgeon above inflation.
Just try getting the same deal from HSBC to buy a high-yield share portfolio – despite the fact that currently the dividends would cover the repayments.
‘Leveraging up’ like this makes a massive difference.
- If I invest £50,000 into shares and the stock market doubles, I have £100,000 and have made £50,000.
- If you invest £50,000 into a £200,000 house and the price doubles, your house is worth £400,000 and you have made £200,000, after backing out the mortgage
Yes I know houses are more work, and need maintenance and whatnot. The point still stands. Taking on debt has multiplied the return from property several times over.
Most of us don’t work at hedge funds, and will never get access to cheap debt to gear up our stock market investments like we can with property.
5. There are no margin calls on mortgages
I covered this in my article on borrowing to invest  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 
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 ARM 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 think they would care if a man turned up every afternoon to tell them exactly what their house was now worth that day (let alone every second, as you get with shares).
Blissful ignorance leaves them free to ignore volatility  in house prices, and so 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 ARM shares have fallen 3%. You panic and press the sell button at your online account. Job done, and the loss locked in.
The liquidity of shares is one of their most attractive qualities, but it’s a double-edged sword for many.
8. You 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 he 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  on your own home.
Many people don’t even realise they’re getting a tax break . 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 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 allowances  from the start, whereas your unrealised gains are all tax-free.
And should you downsize to a smaller property for retirement, the profit you realise is completely untaxed.
You get a second tax benefit by living in your own home, too. As the property owner you’re effectively your own landlord, 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 ‘).
10. Property is a real asset
As a real asset, property has the ability to rise in price with inflation. 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 , 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.
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, and 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:
- Save into it every month
- Do copious research for the best deal before buying
- Ignore price fluctuations
- Hold on for the long-term because selling was a big hassle
- Leverage up 5-to-1
Oh, and get all his returns tax-free…
Have I missed any other benefits of investing in property versus shares? Please add your thoughts below.