Investment Insights Q4 2023: Shaky ground

Why investing in UK property is not always as safe as houses.

By Rathbones Investment Management 27 December 2023


Why investing in property is not always as safe as houses

The idea that bricks and mortar make for a great investment is so ingrained in the culture of the English-speaking world, it has even permeated our language. Take the phrase ‘as safe as houses’. The Victorian publisher John Hotten claimed (in his Dictionary of Modern Slang, Cant and Vulgar Words) that it entered the lexicon directly in response to the perceived safety of residential property after the 1840s railway stock mania — the original tech bubble — ended in tears. But does reality really match the popular perception of the housing market as a favourable alternative to investing in financial markets?

A golden age for property investing?

At first glance, the experience of recent decades seems to validate that view. UK house prices rose by an average of 7.7% a year between 1964 and the start of 2023, while the FTSE All-Share Index of UK equities rose by just 6.3% on average. UK equities haven’t had an easy ride since the Global Financial Crisis. But an equity investor with half of their portfolio in the US S&P 500 Index and half in UK equities would have only seen the value of their holdings rise at the same rate as house prices.

Even if a UK investor had gone all-in on US stocks for the past six decades, their portfolio would still have lagged London property. The S&P 500 has risen at an average rate of 8.4% a year in sterling terms, while London house prices increased by 8.5%. This comparison is simplistic. It doesn’t consider rents or dividend payments, or the impact of taxes, mortgage borrowing, transaction costs and maintenance. But even so, those capital gains from property are clearly not to be sniffed at.

However, there are a couple of important caveats. First, average performance has masked lots of ups and downs. Property has underperformed for long periods since the 1960s. For example, between 1974 and 1991, and since 2002, an investor with a ten-year horizon would have seen more capital appreciation from the 50/50 equity portfolio of US and UK stocks than from housing.

Second, peering further back into history shows that such strong house price growth has not always been the norm. The long-run data shows that once inflation is accounted for (what economists call “real” terms), UK house prices have risen more than sevenfold since the early 1960s. But in contrast, in 1960 real prices were lower than in 1900. In fact, some (albeit patchier) data suggest real prices could have been flat all the way back to the 1840s.

Real UK house prices (1900 = 100)

This chart shows UK house prices, after accounting for the level of inflation in the economy as a whole. To make it easier to view, it uses a logarithmic scale, where each interval on the vertical axis represents a doubling in prices:

Source: Bank of England, Refinitiv, Rathbones. 


What might explain this sudden rise in house prices? Most of the increase until the 1990s appears to be down to higher incomes. House prices generally remained between four and six times the average person’s earnings until then. Since the 1990s though, other factors must have been involved — it’s a well-known fact that house prices have outpaced earnings. The decline in interest rates is a prime suspect. The average interest rate on a tracker mortgage was close to 15% in 1990, whereas rates below 2% were common after the pandemic. All else being equal, lower interest rates allow buyers to borrow more money for the same monthly repayments. Slower housebuilding may also have played a role, but we’ll return to that later.

The impact of higher rates

If falling interest rates helped to drive up house prices between the 1990s and 2021, it’s hardly surprising that rising interest rates since then have pushed prices lower over the past year. The average UK house price was over 4% below its 2022 peak by November this year. However, mortgage rates have begun to tick down again. So perhaps the housing market is out of the woods?

We’re sceptical that’s the case, mainly because houses still appear extremely unaffordable. A typical mortgage payment for a first-time buyer, for example, still equates to almost 40% of average take-home pay. That’s very high by historical standards, and on past form, unsustainable. It’s notable that when houses have looked this expensive in the past, in the late-1980s and mid-2000s, prices suffered a substantial correction. With current mortgage rates, buyers will either continue to reduce the amount they borrow (and therefore offer) or remain out of the market altogether. Indeed, estate agent surveys confirm that the number of enquiries from prospective buyers is still falling markedly. Additionally, with almost 30% of fixed rate mortgage deals expiring between the second half of 2023 and end of 2024, many borrowers will see a significant increase in repayments, which could prompt some sales from households downsizing or switching to the rental sector.

Figure 5: Typical first-time buyer mortgage payments as a share of take-home pay

Shaded areas show periods when house prices are falling year-on-year:

Source: Refinitiv, Rathbones. 


To be clear, we don’t anticipate a 2008-style crash. Banks and building societies are much stricter with their mortgage lending than they were back then. Whereas over 20% of new mortgages didn’t verify the borrower’s income in 2007, that figure has been below 0.5% since 2015. The share of homeowners without a mortgage has increased from 44% to 54% too, reducing the number of households that might be forced to sell up if their mortgage payments become unaffordable. But it’s clear that unless the Bank of England cuts rates sharply and suddenly, which we don’t expect, a further leg down in house prices will be necessary to restore affordability to a sustainable level. If we’re correct, we think house prices would struggle to perform better than equities over the next few years.

Structural tailwinds set to fade

So house prices will probably continue to struggle for a while yet, but what about further ahead? The UK housing market has overcome bigger bumps in the road than this before. However, we think the golden era for investors in UK housing could be over. There are two key reasons why we find it difficult to build a convincing case that house prices will continue posting the strong gains we’ve become used to.

First, the tailwind from the long-term decline in interest rates has faded. Our working assumption is that interest rates will eventually fall back a bit from where they are today, but we don’t foresee them returning to the ultra-low levels seen during the 2010s. We think the risks are, if anything, skewed towards higher interest rates. And even if we’re proven wrong and we do return to a 2010s-style world, there just isn’t as much room for interest rates to fall as there was in the 1990s.

Second, we aren’t persuaded by the common argument that the UK’s housing supply will always remain tight relative to demand. For starters, the relationship between housing supply and prices is complex, and studies often run into problems with data collection and quality. There is evidence that it affects local prices, and that tighter supply can exacerbate the impacts of interest rates and incomes on house prices. That seems to have been the case in Southeast England in particular. But there is not much consensus on the impact of supply nationally. While some Bank of England staff attribute pretty much all of the rise in house prices relative to incomes or inflation to interest rates, others aren’t as convinced.

For what it’s worth though, there are reasons to expect supply to loosen slightly going forward. An often-overlooked fact is that the net supply of new homes, accounting for demolitions, has picked up since 2015 to a rate comparable with the famous post-war building spree in the 1950s and 1960s.

With generations that have experienced declining rates of homeownership set to make up a larger share of the electorate, it’s hard to see a political motive to reduce that supply. On top of that, total population growth is projected to slow over the coming decades. For typical first-time buyer age groups (those in their 20s and 30s), the population is even projected to contract later this decade after a boom during the 2010s.

In summary, there’s plenty to challenge the idea that property investment will be “safe as houses” going forward. We believe that investing in a diversified portfolio of financial assets offers a more attractive balance between prospective risk and reward.