Should you invest in the property market or the stock market?

We’ve noticed that, in the UK, people tend to invest in property ahead of buying stocks and shares for investment. But why is that? And is it the right decision?

This is not a question with a straightforward answer. As with any significant financial decision, the answer will depend on your personal circumstances, goals, and attitude to risk. But in general, property seems to attract a reputation as a “safe” investment, which isn’t necessarily the case and may result in lower returns than the alternatives.

Let’s unpack some of the pros and cons of investing in property versus investing in the stock market.

How does property investment compare to stock market investments?

A likely reason for this trend is that property purchasing feels familiar and tangible. Since people investing in property have been through the process at least once to buy their own home, it’s a process that isn’t at all alien to them. They’ve been through the learning curve already, whereas buying stocks and investing may be an entirely unknown area to them.

Additionally, they’ve almost certainly seen their own home appreciate in value since they bought it and are attracted to the idea of benefitting from this on additional properties. Although the housing market ebbs and flows just as the stock market does, the familiarity bias kicks in and drives the decision making. In other words, it feels “safe”.

Schroders undertook a study in 2022 that showed investing £100,000 into the global stock market 25 years ago would be worth £631,000 today. By comparison, a £100,000 property would be worth on average £454,000 in the UK.

If you looked at 5, 10 ,15, 20, 25 or 30-year horizons for the best historic performing regions for property growth in the UK, the global stock market still comes out on top over any of the periods.[i]

It’s worth noting that these figures refer solely to the price of the property itself. When you consider the impact of ongoing maintenance costs, taxes, stamp duty, and solicitor fees involved in the process of buying and selling, that margin gets eaten away.

[i] Source: What 175 years of data tell us about house price affordability in the UK (schroders.com)

On top of this, the UK tax system is harsh on investment properties. An additional 3% stamp duty is payable for the purchase, on top of standard stamp duty taxes for a second property. Capital Gains Tax on sale is higher than the standard rates and income tax is payable on total rent. You also no longer have the ability to fully offset mortgage interest or improvements against the rent for tax purposes (although you can offset improvements against Capital Gains).

Depending on your specific goals, you may decide that this is acceptable to you. There is no correct answer here – the best you can do is make informed decisions with the facts in hand.

What are the benefits of Stock Market Investments?

On the other hand, stocks can be purchased through investment wrappers that provide tax breaks, such as pensions or ISAs. A UK pension provides tax relief on a contribution at your highest marginal income tax rate (which boosts your initial investment) and a tax-free lump sum of up to 25% on withdrawals. All capital gains and income produced whilst within a pension are tax exempt too. Similarly, an ISA allows gross roll up of investment with no tax declaration for any income or capital growth, meaning both the Pension and ISA allow for compounding tax free returns, which can be very valuable over time.

The graph below shows the effect of contributing of £20,000 into a taxable investment portfolio versus into a pension. The pension would get an immediate tax uplift of 20%. This means that there is now £25,000 available to invest, which would then benefit from cumulative gross roll up, whereas the taxable portfolio would be taxed along the way.

Over the course of 20 years, on an assumed 5% growth rate, the value would be over £60,000 whereas buying the same investment, getting the same gross 5% return in a taxable account, would end up at around £35,000.  

So, the case to buy stocks over property could also look better from a taxation point of view.

But doesn’t the stock market crash in economic downturns and potentially lose a lot of money?

The answer here is that you only crystalise any losses if you sell the stock during the downturn. Short term market movements only show current sale prices, which at the time of economic downturns are suppressed much the same happens in the housing market. You wouldn’t sell your investment property in market downturn at a loss, so why would you sell your stocks?   

At Tideway we aim to buy a well-diversified portfolio which eliminates exposure to one stock known as specific risk. We invest in funds that have a diversity of stocks and businesses with clear forward-looking returns, without taking any undue risks. Strategies for market recoveries are built in and downturns should only be temporary. It is also worth noting here that portfolios do not need to be solely stocks, but can include other asset classes, such as fixed income.

Property

Pros

  • Tangible
  • Easy to understand
  • Can be used to create an income

Cons

  • Unable to keep tax efficient
  • Time consuming
  • High ongoing maintenance cost
  • Expensive entry and exit costs
  • Illiquid – harder to extract the cash when needed

Stock Market

Pros

  • Can be tax efficient
  • Can be highly diverse
  • Higher return potential than property
  • Highly liquid
  • Can be changed quickly and simply

Cons

  • Can be volatile
  • Often harder to understand
  • Professional help likely to be needed

How does this work in real life?

Let’s look at an example case.

Let’s say Jack and Jill were siblings and inherited £400,000 each from their late parents, both of whom were higher rate taxpayers. Jack decided to invest in a second property, whereas Jill invested into the stock market on day one, but gradually contributed the maximum annual allowance into her pension until the full original capital was in a pension.

For the sake of this example, we’ll use the average capital return rate from the past 10 years.
For Jack, according to Land Registry data, the average UK house price rose by 4.33% annualised in capital growth over the last 10 years up to July 2024.

For Jill, FE analytics data shows the IA Global Stock index rose by an annualised return of 10.1% over 10 years up to October 2024.

Then, we have a few other calculations to consider:

  • Stamp Duty – £19,500 which includes the additional 3% rate for second properties, paid by Jack upon purchase of the property 
  • Capital Gains Tax – the current 24% rate makes this a total of £43,126 payable by Jack upon sale of his investment property
  • Tax Relief – Jill was able to claim £100,000 tax relief into her pension.

 

Jack was able to charge £1,600pm in rent. Assuming a 5% increase each year, but also 40% tax bill on the rent, he would receive £144,897.32 over the 10-year period. From this sum, he will be liable to pay for any repairs and maintenance that arise during that time.

In this hypothetical scenario, when Jack sells his second property, he will make a net sum of £536,566. Including the rent he received over ten years, that would make an overall total of £681,463 in net return.

On the other hand, Jill will have almost twice as much – £1,297,736 in her pension, and another £100,000 in higher rate tax relief via her self-assessment. Whilst Jill will have to pay some tax to withdraw from her pension if she has retired, she would be entitled to some tax-free cash and in theory would be able to withdraw at lower tax rates.

This example shows the value of tax planning and investment planning. It is based on current tax rules and past return data, so the next 10 years could look different, but it gives a practical indication of the difference between investing in property versus stocks.

What next?

If you are invested in a solid strategy designed to make money, with a high level of diversity, then the best businesses globally will get through economic downturns, as will their share price. So, if you do have savings that you want to invest, or if you’ve inherited a lump sum that you’d like to do something smart with, it is well worth considering a diversified investment portfolio ahead of property.

Of course, it will depend on your specific goals – what level of return you are after, the level of flexibility you need, whether it’s a second property you’re intending to move into full time later down the line, and so on.

If you have any questions about the content of the article, or if you would like to speak to a wealth manager about your own situation, please don’t hesitate to get in touch with us at info@tidewayinvestment.co.uk.

The content of this document is for information purposes only and should not be construed as financial advice.

Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.

We always recommend that you seek professional regulated financial advice before investing.

Any references to forward-looking yields does not represent the future performance of the portfolio and historic yields and performance should not be taken as a reliable indicator of future performance.