House prices have nearly quadrupled in real terms over the past half century, with the strongest growth seen in the past decade, says a study published by
Halifax last week.
However, if dividends are included, shares have performed even better than property, which will have implications for millions of people relying on their homes to fund their retirement.
In 1959, the average house cost £2,507 (about £43,000 in today’s money), compared with £162,085 in 2009 — a rise of 273 per cent after inflation or an average annual real return of 2.7 per cent, according to Halifax.
By contrast, shares have returned 1,180 per cent after inflation over the past 50 years, giving an average annual real return of 5.2 per cent, according to Barclays Capital. It has been monitoring the performance of shares, gilts and cash for 110 years and will release its 2010 Equity Gilt Study next month.
These figures include dividends. Without them, shares are up only 86 per cent, or 1.2 per cent a year, according to Halifax, underlining the importance of reinvesting dividend income.
The Halifax study also shows that housing has been extremely volatile, with the strong returns of the past 10 years giving homeowners an inflated impression of what property can achieve.
Average annual returns were about 3 per cent in the 1960s and 1970s, when prices rose by 36 per cent and 34 per cent respectively. They then shot up to 4.9 per cent a year during the 1980s, or by 61 per cent overall.
Recession took its toll in the next decade, however, with prices dropping by an average 2.4 per cent (or a total decline of 22 per cent), before surging 62 per cent between 1999 and 2009, or an average of 5 per cent a year.
Halifax said it does not expect prices to rise significantly in the near future.
“The prospects for the market this year will depend on how the UK economy evolves and whether there is a significant increase in the supply of properties for sale,” said Suren Thiru, housing economist at Lloyds Banking Group, which owns Halifax. “Overall, our current view is that house prices will be flat during 2010.”
While property prices surged between 1999 and 2009, it was a lost decade for shares. The FTSE 100 hit 6,930 on December 30, 1999, and has failed to regain that level, closing at 5,413 at the end of 2009 and 5,303 last Friday.
The FTSE All-Share fell by an average of 4.4 per cent a year over the decade, after inflation, or a drop of 1.2 per cent including dividends, according to Halifax.
After such an unusually poor performance — shares generally have a 92 per cent chance of beating cash over 10 years, according to Barclays — many experts think the tide could turn over the next decade.
“Equities have a much higher expected return and higher probability of achieving it over the long term [more than 20 years] than residential property because shares reflect growth in the overall economy through profits generated by business, whereas property reflects only part of the economy,” said Jason Butler at Bloomsbury Financial Planning.
