Article last updated 11 September 2025.
The UK’s love affair with property investment is apparent across newspapers, daytime TV and social media. An English person’s home may be their castle – they’ve also regarded it as their nest egg (and the same for other Britons). Many have even bought additional castles, such is their ardour for property. Reflecting this, official figures show more than 2.8mn private landlords in the UK.
However, the days of strong returns from residential property are already past. The past decade has seen three pieces of bad news. House price growth has been slower; higher interest rates have squeezed the buy-to-let business model; the regulatory treatment of private landlords has become progressively less favourable.
The economic and policy outlook suggests those headwinds won’t dissipate. From 1980 to 2016, UK house prices rose 6.7% per year in absolute terms, or 3.3% in real terms (after allowing for inflation). Prices in London rose even faster: 8.5% in absolute and 5.0% in real terms. That rate of capital appreciation is considerable – and investors making an income from renting out properties would have made even more.
It’s difficult to compare returns from property exactly with returns from other investments, for various reasons – such as the cost of mending that leaky roof. But taking the crude numbers, the capital appreciation of a portfolio made up of 25% UK equities and 75% international equities would have been only slightly higher at 9.0% per year or 5.5% after inflation (figure 1).
Figure 1: Equities leave property trailing
The stock market has been more profitable than property for UK investors over the past 45 years. £100 invested in global
equities in 2016 is now worth £174 compared with £134 in UK property and just £111 in London housing
What drove high house prices?
What lay behind this? One cause is higher wages. As earnings have risen in real terms, households have been able to spend more on housing.
Between 1980 and 1998, the average UK house price rose by 2.6% above inflation per year. So too did the average wage. As result, the house price-to-earnings ratio – the average house price divided by average earnings – was similar in both years, at around 4.3, although it did fluctuate a lot between these two points (figure 2).
However, since 2000, the ratio has risen to as high as 8 and never fallen below 6. So pay can’t be the whole story behind the price rises.
Figure 2: What’s driven house prices over time?
This chart shows average house prices divided by average earnings. For much of the 20th century, UK house prices rose
in line with earnings, but since 2000 they’ve climbed far beyond.
A fall in interest rates helped sustain higher house prices relative to earnings. Double-digit mortgage rates were the norm in the 1980s and early 1990s. But these dropped to as low as 1–2% by the late 2010s. This shift allowed buyers to borrow a lot more money for any given level of monthly repayment, bidding up house prices.
Other changes to the mortgage market have probably helped push UK house prices higher, by increasing the availability of loans and encouraging property investment. These include the entry of banks into the mortgage market, the introduction of buy-to-let mortgages, and market innovations, such as the government’s Help to Buy scheme.
Moreover, housebuilding has failed to keep pace with population growth over the past fifty years or so. In other words, demand has risen faster than supply.
Productivity, rates and policy
But conditions for house price growth now look much less fertile. After a period of far outstripping inflation, average earnings have grown much more slowly lately. Even if we ignore declining real wages in the early 2010s, they’ve only outpaced inflation by 0.5% a year since 2016. In the long run, real-terms wage growth is closely linked to productivity – companies generally only pay their workers more if they’re getting more from them. But productivity growth has in recent years been low – and we don’t foresee a dramatic improvement anytime soon.
Moreover, mortgage rates have risen in the past few years. The average 2-year fixed-rate 75% loan-to-value mortgage rate has climbed from 1.2% in 2021 to above 4% since 2022, according to the Bank of England. This has pushed up first-time buyers’ repayments. We don’t see a return to the abnormally low interest rate environment of the 2010s.
On top of higher interest rates, unfavourable tax changes and tighter regulation have added to costs. For example, stamp duty on additional properties was hiked in 2016 and again in 2024.
Moreover, the housing supply pipeline is flowing better. Although the government has fallen short of its housebuilding targets for years, the annual net increase in dwellings has crept back up since 2015, returning to above 200,000. On this measure, the housing stock is growing at the fastest rate since the 1960s.
End of the affair
With those fading tailwinds in mind, it’s little surprise that UK house prices have risen by a much more pedestrian 3.7% per year, in absolute terms, since 2016. That’s only about the same as inflation. Over the same period, the portfolio of UK and international equities we mentioned earlier rose by 7.2% a year.
We think this trend will continue. In our view, it may be time for the British to break off their love affair with the housing market and embark on a new one, with a diversified portfolio of financial assets. After all, 10- year UK government bonds offer yields above 4% and there’s a wide selection of high-quality names across the world’s stock markets. It might not be the most romantic of trysts, but we think it’s likely to offer them a better return in the long term.
