Shares should do better than buy-to-let, investors told

Buy-to-let investors could get a return of just 3% per year between now and 2025 – and would do better with ‘riskier’ shares.

New analysis by Pricewaterhouse Coopers says the 3% that it projects would be before tax but after running costs. PwC describes housing’s long-term returns as ‘reasonable’ despite short-term weakness.

It says housing is ‘significantly riskier than index-linked gilts but offers lower risk and expected return levels than equities’.

The latest analysis draws on a recent PwC report which forecasts growth in average UK house prices of around zero between 2007 and 2025.

As house prices have fallen by around 20% since their peak in 2007, however, this does imply some real growth between 2012 and 2025, averaging around 2% pa. This reflects the fact that, while demand for housing may not be as strong as in recent decades, UK housing supply will remain constrained.

A 2% average real rise would nonetheless represent a modest rate of increase relative to historic average real UK house price growth of around 4% pa between 1984 and 2007, and around 3% pa between 1984 and 2012.
 
PwC’s analysis compares potential investment returns for housing (including net rental income) versus other assets (equities and index-linked gilts).

It says buy-to-let housing should return 3% pa, equities 5.5%, index-linked gilts 0.5%, and a mixture of equity and index-linked gilts 3%.

John Hawksworth, PwC’s chief economist, said: “There remains significant uncertainty in the UK housing market and it’s likely to remain relatively subdued in the short term while economic uncertainty persists at high levels and dampens down demand.

“But in the longer term, we expect supply shortages to reassert themselves given recent low levels of UK house building, pushing up house prices later this decade.

“Our analysis suggests that the prospective return on housing in the period to 2025, while not as good as many people have got used to in recent decades, could be broadly similar in terms of both risk and expected return to a balanced mix of index-linked gilts and equities.

“Given that housing returns will not be perfectly correlated with returns on equities and gilts, including housing in an investment portfolio together with these other assets could have some advantages in terms of diversifying risk.

“However, any such decisions need to be based on a detailed consideration of individual investor circumstances and need to bear in mind that housing is a potentially risky asset as recent experience makes all too clear.”

According to surveyors, rents are still rising as tenancy demand increases – see next story.