My house hasn’t been a great investment | Weekly Market Update

The SpaceX IPO launches today. At $1.8trn its market capitalisation is around half that of the UK FTSE 100 and the $75bn raised would (almost) be enough to buy National Grid. It also feels a pretty important test of market sentiment and momentum. Early signs on this are positive but I will wait to see how it trades before writing more on this next week. And for clients wondering OK, OK but do I own it, the answer is not yet. The IPO needs to be “seasoned” by trading in the open market before it is included in passive indexes and ETFs. And for the largest S&P 500 index (which most of our passive investments are indexed to) this seasoning period will be (at least) a year.

Instead, this week I thought I’d write about something closer to home. As a London (terraced) property owner I was much struck by this chart:

 

London house prices are now more or less flat in inflation-adjusted terms since 2006 and are down pretty sharply over the last 10 years. In a break from how I normally do it, my comments on this are first and then charts to provide some evidence are at the bottom.

1. Obviously, from a purely personal investment perspective this isn’t a great outcome. UK property investing (especially when you allow for the fact that you can easily leverage it by borrowing) handily trounced UK equity investing up to 2008. Since then, it has very much been the other way round. Much of the fall in real property values has come in the last 10 years. In contrast, the UK FTSE All-Share is 95% ahead of inflation over the last 10 years. And for global equities that number is almost 250%.
2. But I am also a parent. If you worry about how the next generation are going to afford a home, then surely lower house prices are part of the solution and higher house prices part of the problem. I am not sure a bubbly residential market that always goes up is desirable or, over the longer term sustainable. So net, net I think a more boring house price market is probably a good thing even if my net worth has taken a hit.
3. And, equally, the past is the past. Equities have just had a great run. Is it now the time for property to take over again? Unfortunately, here, my outlook is for residential property to stay, at best, boring. One reason for this is that the higher interest rates that helped push the market down look to be here to stay. One rough estimate for the average bank base rate over the next 5 years is just the 5 year gilt yield. This is 4.4% today and almost three rate rises higher than the bank base rate of 3.75%. The market is still expecting two UK rate rises over the next 12 months.
4. Markets are also about supply and demand. And UK immigration is falling sharply. Net immigration has fallen from over 900,000 a year at the end of 2022 to under 200,000 today. Mechanically, this means less demand for housing.
5. At the same time the world has become a much harder place for landlords. The removal of no-fault evictions reduces their options once a property is let. And buy-to-let and second home tax rises have made it harder for property investors to make money. Fewer private landlords also means less demand for property.
6. And, finally, a word on stamp duty. This is a tax that raises a relatively small amount of money but, by reducing people’s ability to move, negatively affects a lot of lives. If I could waive a magic wand I would get rid of it all together. And every time that I hear it is going up (as it has been recently) I wince. Reducing labour market mobility isn’t good for anyone and, as my final chart shows, there hasn’t been a meaningful rise in tax revenues to compensate.

So, putting this altogether, I find it hard to get excited about the next 10 years for UK residential investors. The only crumb of comfort I can offer is that this might make it a slightly more affordable world for our children and grandchildren to live in.

Finally, here are the charts. Yes, it’s been a bull market, but still the outperformance of equities compared to inflation (and property) is striking:

I also find the large fall in net immigration noteworthy. This will surely have knock-on effects other than the property market:

And I don‘t think interest rates will bail the market out in the near term. Here is the UK 5 year gilt yield. The jump higher after the Iran war started has not yet evaporated.

And finally stamp duty. Grrrr. And I would add to my complaints that all the recent rises have not actually resulted in higher revenues for the UK government:

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.