Why You Should (and Shouldn’t) Invest in UK Property 🏠

Maybe you’re considering investing into property because you have a hunch that it’s a good idea. 🤔

Maybe you’ve watched too many episodes of Homes Under the Hammer 🔨 (I know I have).

Or maybe you know someone personally that’s done well in property.

But should you really invest your hard-earned money into property?

This post gives you some answers as to why property in the UK can be a solid asset class to get into.

Inflation Makes Your Money Worth Less ❌

Inflation means you can buy less with £100 today compared to £100 in the past.

Here’s an example.

£100 in 1950 is worth about the same as £4,384.10 today in terms of what it could buy you. 

This is the same as saying that the same £100 has lost 98% of its value since the year 1950.

So think of it this way, 

Today with about £4300 you could probably buy a used car.

But if you just kept that £100 in cash in 1950, today you could buy a lot less. 

You might struggle to buy a decent bicycle let alone a car. 

But, what about debts?

Well, if in 1950 someone said

“Here’s £100 in cash, do what you want with it, but in 2023 give me a £100 back in cash”.

Well, frankly they’d either be a financial nincompoop or just a very nice person.

In today’s terms, it’s like giving someone £4380 worth of goods and services to someone in 1950, and then only asking for £100 worth of goods and services back. 

Or for a better analogy, giving someone 4380 apples and only asking for 100 apples back. 

This is because inflation has taken its effect in the meantime.

Basically, inflation is good for you if you hold a lot of debt (which is what mortgages are).

So inflation makes your money worth less over time, but it also makes debts worth less over time (a secret wealth builder for property owners).  

Freddo Chocolate Bars and How Inflation Is Measured

I remember 15-20 years ago when Freddo chocolate bars were 10p.

Today, you’d need to shell out a whopping 25 pence! 

That means the buying power of the pound is about 40% of what it used to be for Freddos.

You could only buy 40% of a Freddo in 2023 for the money that could have bought you 1 whole Freddo 20 years ago.

Now, prices for different products and services change by different amounts, so inflation for different categories is actually different. 

For instance, for a lot of tech products prices actually come down over time.

TV’s are a good example here.

50 inch TV would have cost an arm and a leg only 10-15 years ago, but now they’re a lot more affordable and come with better specifications.

That’s why we look at inflation as the general price level across the economy by looking at a ‘basket of goods and services’ that the average household spends money on. 

This ensures that we look at an average across the types of things a typical household would spend money on. Not just Freddos.

What we use to measure inflation and how the government lies to you

We use the CPI in the UK. 

This is what the headline figures of inflation are based on.

So if you see your fuel bills go up 50% but for some reason the news keeps saying that inflation is only 10% , it’s because they’re looking at the average of different goods and services. 

It’s also a weighted average.

This just means that if the typical household spent 10% on fuel, then the price of fuel would only have a weighting of 10% of the inflation figure.

There’s something sneaky about the CPI though. 

It doesn’t include housing costs like mortgage payments, which is a pretty big cost faced by households.

To find out house price inflation you have to look things like at house price indices. 

And there are quite a few of them.

House Price Indices 📊

House price indices measure the average house price in the UK and how they change over time.

Here are some different house price indexes in the UK:

• Halifax House Price Index
• ONS (Office for National Statistics) House Price Index
• Zoopla / Hometrack
• HM Land Registry / HPI
• Nationwide HPI
• Rightmove Asking Price Index

Out of all these indices the only one that includes every house purchase in the UK (including cash-only purchases) is the Land Registry index.

The ONS data is based on the same Land Registry data.

The main problem with the Land Registry index isn’t the accuracy but the delay in reporting – you have to wait 2 months before you can see the data for a given month.

The Rightmove index is purely for asking prices (or list price) so it doesn’t fully represent what houses are actually going for. 

The Halifax and Nationwide indexes rely on their own mortgage product data.

Halifax is part of Lloyds banking group which provides 19.5% of all mortgages in the UK, and Nationwide provides about 12% of the UK mortgage market. (Source: UK Finance)

So these two each act as a decent sample size of mortgage approvals (which also tell us the sold house prices).

The best way to look at these indexes is to use a mixture of them to get a better idea of house prices. 

Looking at a combination of asking prices and actual sold prices actually helps in giving you an idea of how people in the market feel about prices and where they are going.

• When asking prices are above the sold prices by a large amount you could see this as sellers being greedy, because they are asking more than what the buyers are willing to pay.

• When asking prices are lower than sold house prices you can see this as buyers being greedy, because they are expecting their house price to go up in value to make it worth what they pay for. 

Let’s take a short dive into history to see how house prices in the UK have changed.

Historical Property Prices in the UK 🏡

Let’s start with an anecdote.

My grandad bought a house for about £90,000 in London in 1989 (this was at the peak of house prices at the time.

The same property is valued at around £900,000 in 2023.

That’s around 34 years and a 10x in house price. 🤯

But this is just one example for one type of house in London.

Let’s look at the average across the country.

We’re going to have a look at historical property prices so for this we don’t really need fully up-to-date information. 

We just need accurate information over a long period of time. So for this we will use the Land Registry data.

We’re going to go back 50 years (equal to two 25-year mortgage terms) and look at the data in 10-year increments to see how house prices have changed in that time.

Hint: You’re going to be shocked.

We’ll start in 1973 and end in 2023. The house price data we are looking at is from January of the year in question.

Crazy right?

The average house prices in January 2023 was £280,531 more than in 1973.

That’s a percentage change of 3616% over a period of 50 years. 

That’s pretty nuts. 

But to be fair, 50 years is a long time and so many things change that the scale of change can get a bit out of control. 

Let’s get back down to earth and look at a more recent time frame looking at just one standard mortgage term of 25 years. 

For this, we’ll look back to 1998 and compare it to 2023.

This time we’ll look at the prices every 5 years since there’s a shorter time period overall.

The average UK house price was £222,058 more in January 2023 than in January 1998.

This was a 335% increase in UK house prices over 25 years which works out to about an average house price increase of about 4.95% every year.

But how do I compare that to the price of the pound (£) and general price inflation? 

Well, why don’t we have a look? 

£1 in 1998 is worth £2.25 in 2023. (source)

This is a total percentage increase of 125.14% where the average annual inflation rate was around 3.3% in the same period.

In the 25-year period from 1998 to 2023 property prices have outperformed inflation by about 1.65% per year.

This might not seem like a lot but because of compound interest, this is actually really good. 

To show you how 1.65% per year can add up to a lot, look at the example below.

Over even longer periods property prices in the UK outpace inflation annually by about 2% on average. 

House prices went up in value about 210% more than inflation meaning UK property was an inflation-beating asset in this time period… by quite a bit.

If you put £100,000 into the property in 1998 it could be worth £435,000 now (335% more).

If you had £100,000 in 1998 and just held on to it until now, well you’d just have £100,000 in 2023. 

But that same £100,000 in 2023 is worth less than what £100,000 would have gotten you in 1998.

£100,000 worth of goods and services in 1998 would cost you about £225,000 (125% more) in 2023.

I hope I’ve not confused you here. (I hope I’ve not confused myself too 🤔)

Basically, house prices go up faster than inflation over the long term. 

Rental Price Inflation

You might be wondering well if inflation goes up and I’m renting a property out, won’t I be earning less and less every year because of inflation if I’m getting paid in pounds (£)? 

No. 

Over the long run rents tend to follow or beat inflation meaning you’ll still be getting more in ‘real terms’. 

This is because wage inflation is part of the general price inflation, and when wages go up market rents tend to go up too. 

Related reading: Average Rental Price Inflation in the UK

Inflation Goes Up Debts Go Down 🤑

So we touched on this before, but let’s cover it in more detail.

If you take out a mortgage of £100,000 on an interest-only mortgage you have to pay it off in 25 years. 

But luckily for you, in the space of 25 years, inflation has eroded the value of that £100,000 significantly. 

If we take the example of 1998 to 2023. 

£100,000 in 2023 is worth about the same as £56,000 in 1998. 

This is because inflation has eroded the value of the debt. 

You won’t exactly get the difference straight into your bank account, but it’s like an invisible force that just helps you out for taking on the risk of holding an asset

Think of it this way.

Imagine it’s 1998 and I say…

“hey, I’ll let you have this £100,000, just give me back £56,000 in 2023.” 

You’d bite my arm off.

So inflation is great for people that have debts, but it’s terrible for savers. 

My Friend Said To Invest In The S&P 500 📈

At this point it’s easy to see why investing in UK property is a decent investment compared to just saving money and letting it be eroded by inflation.

But, how does it compare to the S&P 500?

A very common way that people invest their money is through index funds or ETFs (exchange-traded funds). 

S&P 500 index funds are some of the most popular ways for people to do this.

So how much would the S&P 500 make over 25 years?

Let’s have a look…

You can see here that between 1998 and 2023 that both the S&P 500 and UK property are inflation-beating assets, but UK property has appreciated the most in price (on average).

This isn’t taking into account reinvesting dividends to keep it more simple, but at the same time I’ve not looked at rental profits either in the property scenario.

S&P 500 is not a bad choice, but house prices seem to edge it here when we ignore dividends or rental profits.

Supply and Demand of UK Property ⚖️

So now you have seen that prices go up in the UK when it comes to property, but what causes this?

Well if we get to the basics of supply and demand we can see why this happens. 

In the UK we need more houses than we have, so demand is higher than supply and prices keep going up over time.

Sometimes there are corrections where things go crazy, but in the long term, they’ve tended to go up.

So will this under supply of housing continue?

Different studies and organisations say different things.

Basically, we don’t build enough houses in the UK, we keep missing the target, and the population keeps getting bigger.

You Can Make Property More Juicy 💦

What do I mean by this? 

Well, if you just put in £100,000 into the S&P 500 or gold or Bitcoin or whatever,

You can’t really do much to influence the value of these underlying assets.

You’d have to be the CEO of Apple, Facebook, Google and more, all at the same time, to even think about making a dent in the S&P 500.

And that’s not going to happen. 

The same goes for other assets.

You can’t really affect the price of Gold or Bitcoin on your own. 

But with property, you can add value. Getting more juice out of your asset.

There are a number of ways you can do this but some obvious ways include

• Adding an extension
• Replastering walls
• New carpets or flooring
• New kitchens and bathrooms
• A new lick of paint 
• New double glazing
• Getting planning permission to build on the property
• Title splitting a larger property into multiple properties

Remember there are countless ways to add value to a home and these are just some examples. 

Since you can add value to a property you can reduce your risk too and increase your ROI. 

The key is to make sure the value you add costs less than what it cost you to add that value.

Have a look at comparable properties in the area to see what they’re going for and what kind of standard they are in.

By doing this you’ll get an idea of what changes will and won’t add value.

Another thing that’s good about the property market in the UK is that there are deals to be had.

You can’t just walk up to Hargreaves Lansdown and say I want to put money into an S&P 500 index fund, but give me 25% off.

But in property people will sell for below market value (BMV) and this could be for a variety of reasons…

There are other reasons a property can be below market value too but that’s not the point of this article. 

• Related Reading: How to find your next BMV property deal

Why You Should Not Invest In Property ❌

Ok, so we’ve seen how property is a decent asset class to get into. 

But who should NOT invest in property as an asset class?

Here are some things to consider.

Long Term Mindset ⌛️

Having a long term mindset is extremely useful in property.

Yes, you can make high returns in the short term depending on what strategy you use.

But often the big money is made in the long term through capital appreciation (increase in house prices) and inflation eroding the value of debt.

People often say that property is a get-rich slow scheme. 

One of the best things about property is that if you hold on long enough, it’s hard not to make a decent profit or gain.

Not Very Liquid 💧

One downside to property is how illiquid it is.

This means that it is hard to take your money out at the drop of a hat. 

The opposite of this would be cash in a current account which is very liquid, meaning you can just use it as you please at any time.

If all your money is in a property and you want to use it, you’ll have to either sell or refinance the property.

Refinancing can take weeks and selling can take months.

And depending on the market it might be hard to sell or refinance the property at a rate that is suitable for you so you might have to wait even longer.

Either way there will be fees involved. 

If you prefer to have money easily available to you, something like an index fund may be better because it’s much easier to withdraw your money.

It would be a matter of days to see your money rather than weeks or months.

Capital Intensive 💰

Ok so property in the UK is expensive. You’ll need around 30% of the purchase price of a buy-to-let property available in funds to purchase an investment property.

There are some cheaper ways to get into property but overall, real estate in the UK will require a lot of capital to get into.

Capital meaning cash or credit. 

So you have two options…

• You have lots of cash or credit available to you.

• You have access to someone who has capital and is willing to work with you on deals. 

Either way you will need to have access to capital to get into this game properly. 

Even cheaper ways to get into property like rent to rent still require some money of your own. 

If you don’t have access to capital you may want to consider index funds, other investments, or even just starting your own business to generate more cash flow. 

For example, you could start a property deal sourcing business.

This way you can generate cash flow while gaining more experience in property. 

Not Willing to Research and Strategise

If you’re not willing to do your own research and learn about the property market, it might not be for you.

You’ve seen the stats earlier in this post telling you how much average property prices have increased over time.

But that is just the average.

There will be some properties that have increased a lot more in price, and some that have increased a lot less.

If you pick the worst properties in the worst areas then there’s not much point going through the hassle of investing in property.

Even if you are getting other people to source deals for you, you still should know enough that you can do due diligence on any potential property investment.

Recap

Ok so by now you should know some of the reasons that make property a good investment in the UK.