Property versus Pension

Date Published: 1 September 2016

Category: Investment, Pension

Tags: , ,

Bank of England Chief Economist, Andy Haldane stated in his latest interview, that property is a better investment for retirement than a pension.  But what are the facts? Is this view misguided?
Since Andy Haldane’s comment last Sunday, I have read self-interested nonsense from a pensions expert claiming that Haldane was wrong because pensions were cheap to run, typically costing around 0.75% pa as compared to up to 10% pa to run a property.

This is patent nonsense as many can simply choose to buy a larger house to live in rather than have to have someone else manage a property.  It was pretty obvious that Mr Haldane was talking about houses rather than commercial properties.  Similarly, this expert seems to have forgotten the costs that his own platform that charges of up to 0.45% a year on top of any fund costs (let alone the hidden fund manager dealing costs).

Instead of focusing on the costs and the associated taxes of one option against the other, which will vary enormously for each individual depending on how (and who) they choose to manage their pension or their property, it is worth interrogating the actual facts of house price returns vs share returns.

I have looked at long time periods to reflect that pensions tend to have a long term investment horizon (unlike Andy Haldane).  I researched both the UK and the US house prices vs equity prices using the main equity indexes (S&P 500 for the US and FTSE All-Share for the UK).  Then compared this with two leading house price indexes, the Federal Housing Finance Agency US House Price Index for the US, and the Nationwide All Houses Price Index for the UK.  I compared the US index from March 1988 and the UK since January 1986 (being the longest period in which I could obtain detailed total return data for both the FTSE All-Share Index and S&P 500 Index).

Critics may find reasons why such start dates are unfair, so I then compared the returns of UK and US house prices against UK and US share prices over every quarterly 20-year period since the start, and calculated the chances of shares beating property in each market.

Here are the results:
UK shares Vs UK houses — annualised return UK shares 9.5% pa vs 5.9% pa UK houses
Property versus Pension graph 1

Sources: SCM Direct, Nationwide, Bloomberg


US shares Vs US houses — annualised return US shares 10.1% pa vs 3.3% pa US Houses
Property versus Pension graph 2

Sources: SCM Direct, FHFA, Bloomberg


Looking at the 20 year periods
UK — the average outperformance of UK equities against UK house prices over 20 years, analysing 43 quarterly 20-year time periods since the start of 1986, was 184% and shares beat houses in 91% of the periods analysed.
Property versus Pension graph 3

Sources: SCM Direct, Nationwide, Bloomberg

US – the average outperformance of US equities against US house prices over 20 years, analysing 30 quarterly 20-year time periods since the end of March 1988, was 402% and shares beat houses in every single period analysed.

Property versus Pension graph 4

Sources: SCM Direct, FHFA, Bloomberg

Maybe Mr. Haldane as a trained economist should look at the data before making damaging and irresponsible comments and conclusions.  Of course, he might say that this was the past and it will be different in the future — however given the statistics on house price data against incomes, it is hard not to conclude that UK house prices are already ridiculously over-valued:
House price to earnings ratio

If we forecast future UK share price returns over the next 10-15 years based on the ratio of UK share prices to the smoothed corporate earnings of UK Companies (known as the CAPE Ratio), this would predict UK shares to grow at 7.5% pa[1]In comparison, were the ratio of house prices in 10 years-time to simply fall back from 5x to a more normal 4x and the average income rose by 3% pa (the growth in average weekly earnings since January 2000), this would imply that UK house prices would rise by just 0.7% pa.  Thus over 10 years you would be 99% better off having bought UK shares than a UK House. 

Sorry Mr Haldane — looks like you’re going to have to delay your retirement if you choose to buy that house rather than those shares.

Alan Miller — CIO, SCM
Tel: 020 7838 8650
Please Note: Past performance should not be seen as a guide to future returns. The value of investments and the income from them can go down as well as up and investors may not recover the amount of their original investment.
SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority to conduct investment business.

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Ben Kumar
1 year ago

Alan – really good piece. Is the missing link between your data and Mr Haldane’s conclusion simply the fact that a bank will happily leverage you into the property market 3-4x, whereas that is far more difficult in the equity market?

Anne Sander
1 year ago

Alan, while I agree with your approach of comparing property investments to equity as it applies to the accumulation phase of pensions it is somewhat flawed when it comes to the payout phase. At the time of purchasing an annuity the investments will typically switch heavily into fixed income (mostly bonds) to support the pension income stream. Of course some of the cash flow from the bonds gets put aside to pay management fees but also to cover reinvestment risk and to provide the guarantee of pension payment for the remainder of the prisoner’s life and sometimes that of their… Read more »

1 year ago

Very interesting response to Mr Haldanes interview, although Ben makes a point similar to my own practical experience in thinking about comparisons. I’ve looked at the data a number of times in the past. I’ve found it difficult to incorporate correctly or accurately the income produced from renting out the house (and repairs and maintenance) as well as the effects of gearing, both of which are common approaches for UK residential property investors. Reinvestment of dividend income is usually included when comparing equity investment and when excluded returns are nothing like as impressive. If I make a few simple assumptions… Read more »

Kevin Gardner
1 year ago

Good point about leverage. Also, how have you treated re-investment of income? Shares yield dividends and property rent as well as capital appreciation? Would be interested to see a version where this was re-invested.

Ron Hagen
1 year ago

An interesting read! Thanks. Could you elaborate on how you calculated those returns? Are you comparing index vs index directly at macro level, or are you also making any corrections for like administration/service fees? I think at micro level, what is also important is the tax laws, which would affect the way those returns are calculated. Not sure about UK, but in Norway, for example, there is a strong incentive to buy a bigger house (low interest, deductible against high income tax rates, low book value of property) and rent out part of it as a tax-free second income (compared… Read more »

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