When evaluating investing choices, the first thing to do is compare the return from its current earnings. To make a simple comparison, let’s look at the S&P500 for shares (or the stock market) and the UK price index for the property market.
THERE ARE TWO WAYS TO COMPARE:
What are the historic returns?
i.e. How has it gone up over the last 50 years.
What is the current return based on the cash flow it provides?
i.e. If I buy at the current price, what return do I get on its earnings (or yield)?
The cash flow is an investment-based approach, whereas the historic returns are more speculative.
PROPERTY VS SHARES: COMPARING BY HISTORIC RETURNS
For the purpose of this example we will assume that income from share dividends and rental income is taxed at the same rate.
To get the total return figures, we need to add the price increase of the asset to any income it makes. Since 1952, UK property prices have appreciated 7.74% per year. The return on property is equal to the price appreciation plus the net income. The net income is equal to the rent, taking void periods in account, minus all costs including maintenance, fees etc. I am going to assume this is 3% per year to allow a good budget for maintenance (which is often overlooked and underestimated).
The property return is 1952-2015 and the S&P500 is the total return average 1965-2014.
My gut feeling is that, during this period, shares would have beaten housing easily. One reason perhaps is that UK houses don’t generally disappear, whereas failing companies do.
PROPERTY VS. SHARES: COMPARING BY CURRENT YIELD
Here we need to compare the net income on property with the earnings the S&P500 makes. Some of the S&P500 earnings are retained and not paid out as dividends, but they still count as the earnings of the asset.
Source, Tim O’Shea, 2014, Full Article Here