Well, here's a little gem for you to take along to the pub and share this weekend.

In February, 1998, the FTSE 100 stood at 5,767.
On January 23rd, 2008, the index closed at 5,609.

That's a 2.7% drop in ten years. Not terribly impressive, I think you'll agree - and that's before you take into account ten years of inflation. (The market is now on the up again, but the point stands).

Now, in January 1998, the average house price in England and Wales (according to the Land Registry) was £79,715 (up from £72,900 a year earlier).
In November just gone, the latest figures available, the average price was £218,330 (down almost £2,000 on October) according to the Department of Communities and Local Government.

That's a 173.9% rise in ten years. I know which market I'd rather be in...


Some gem...totally flawed.

If you had invested at the peak of the FTSE100 in 1999 you by now be well up on your initial investment.

You seem to have forgoten to mention dividend reinvestments year on year. Add 4-7% typical yield and when shares fall you will simply be buying more shares at a cheaper amount.

http: / /www .fool .co .uk /news /Comment /2006 /c060131e .htm

Buy a property at its peak and you will suffer for years. Maintain a regular monthly contribution into the stockmarket and you will gain from the falls over the years.

Secondly you mention inflation. Do you not think the same applies to property??? The real term value of a property falls when its capital increase is less than the current rate of inflation. This is now the case in the UK.

Thirdly, you seem to imply that past performance of property v share is some kind of guide to future performance? The mere fact that property has outperformed shares over the past 10 years should be some sort of warning that this will not continue.

UK shares have priced in for a recession whether one happens or not. UK property is so overvalued that there cannot be any real growth over the next decade. The credit crunch has finally ended the days of cheap credit and high lending multiples. There will be stagnation at best for at least 5 years.

Hi Tom

Thanks for your thoughts on my "little gem"!

You're right to suggest that my take was a little over-simplistic, and perhaps not explained as fully as it could have been, but to say it is "totally flawed" is taking things a bit far, don't you think?

I was merely thinking of an investor taking a sum of money - say, £10,000 - a decade ago, and dropping half of it into an average-priced house, and half of it into FTSE stocks. And that's it!

I had no intention of complicating the picture with the minutiae of dividend reinvestment, rent reinvestment, inflation and the like. Of course all that has an impact, as does the fact that you can leverage your investment into the property, where you can't very easily do so with stocks, unless you get into stock options and so on. And we haven't even mentioned renting your shares out for an income! Can you see how such a small example could rapidly become an entire book??

My simple scenario was designed to point out the massive difference in performance over the last ten years - nothing more, nothing less.

Past performance is indeed no guide to the future - every investor knows that! However, UK property has averaged 8%-10% over the past fifty years or so, and house price growth has only actually been negative in four years (1990-93) since 1970.

I still know which market I'd rather be in!

It's clear that house prices have gone too far, and are due a period of plateau-ing or modest falls. And everyone has their own view as to how long this will last for! However, property investors should never be in danger of buying property at its peak, as we should always be looking to buy at below market value, which also insulates us somewhat from the downturns.

Furthermore, the disappearance of high lending multiples has no impact on us, since we never play in that arena, either.

Thanks again for your comments.

Rob

Rob,

Cheers for your comments. I think an argument between a stock investor and a property investor will never be easily settled! I appreciate your differing viewwpoint.

All I will add is that given £10K now and a regular monthly income (i.e. the amount a property investor needs to negatively fund a property per month at present) and I would take that invetement into the stock market any day over buying a UK property with it as we currently stand.

Stocks are valued low at present, no doubt about it. UK property is quiet the opposite. I think the FTSE100 is on about 11 times multiples which represents excellent long term value. No doubt PS will come back and say as they always do - you cant compare stock value investing against property investing. Absolute drivel...

Anyway, what I am interested in is BMV. Lets say you get 20% knocked off at auction, well I believe the UK market is likely to fall by at least this amount in the next 2-3years in real terms so why exactly is it worth persuing such properties? Do you think 20% off represents good value and that in the next few years the market will fall by less?

Cheers,

Tom.

Differing opinions are what the world go round!

Let me ask you this. Why would a property investor need to fund a property? The lenders want to see 125% rental coverage, and so should any investor - more, if possible! No one should be subsidising their portfolio!

I agree that stocks are under-valued and property over-valued, but your £10,000 in the stock market is only ever going to grow (IF you get your picks right) at x% x £10,000, whereas my £10,000 in property is going to grow (IF buy BMV) at x% x £100,000. That's a huge difference right there!

Is a 20% discount good value, and do i think the market will fall be less? Yes, and Yes!

When I said that property has only fallen in four years since 1970, those percentage drops were -1.3% (1990), -1.4% (1991), -3.8% (1992) and -2.5% (1993). They're not huge numbers, even taking inflation into account, and I see no evidence right now of this time around being even close to this deep or this protracted.

Employment is good, unemployment is low.
People are living longer.
Household sizes are shrinking.
Immigration is rising.
Divorce is still rife.

All this points to an increase in demand for housing and, on the supply side, we're still short by around 150,000 homes, which will take years, if not decades, to catch up on.

For us as investors, credit is still historically cheap, so through this year, as the market wobbles for a while, it's the time to fill our boots with BMV properties - in my view, at least.

The stock market has it's uses - I used to work there! - but as a stock holder in a company, you're entirely at the whim of a group of people over whom you have no control. Plus, no one needs stocks to live (whereas everyone needs a place to live), and there's no telling when your company will go under. At least if your property falls down, you're fully insured for the loss!

Each to their own, tom. Each to their own.

Rob