Common wisdom says real assets are the best way to combat rises in the cost of living. Common wisdom also says the best real assets are gold and property.
All you need to do is pick one?
But which do you choose?
Spoiler alert: For most people, most of the time, there’s only one choice to make.
Let’s get into it.
We all know property prices have increased in pounds since the dawn of time. That’s a given, but what about gold?
The following graph answers that question pretty emphatically.
Gold vs sterling
Source: Bullion by Post
Without a shadow of a doubt you need a lot more pounds to buy an ounce of gold than you did in the 70s (or 80s or 90s or previous 00s!)
In case you are wondering, you needed about £15 to buy an ounce of gold at the beginning of 1970, whereas today you need over £1500.
Gold has increased 100 fold against the pound over the last half century.
But what about property?
We all know property has gone up in value, but how has it done compared to gold?
The following chart prices houses in gold (blue line) and pounds (green line).
Gold vs house prices
Source: Priced In Gold
If you look at the green line first, you see how many pounds are required to buy a house over time. As you’d expect, you need a lot more pounds to buy one now than you did in the 50s.
But here’s the interesting bit. The blue line shows the price of houses in terms of gold. As you might not expect, you need more or less the same amount of gold to buy a house today as you did back in the fifties.
Say what!
Sure there’s been some fluctuation there but it’s still a much flatter line than the one for pounds.
In other words, the price of gold and houses has stayed pretty consistant over time. On the face of it there seems to be nothing to choose between the two.
However, when you dig a little deeper things begin to be a little clearer.
Investment returns
I’m sure we can agree that property and gold look as though they provide pretty similar investment returns, but what investment returns are we talking about here?
According to the best data out there that stretches back to 1845 UK property has increased by 1.1% per year above inflation.
(A couple of quick points on that. First, it’s a real number ie above inflation. If we include inflation it was just short of 4% annually. And it’s also worth saying that other sources of data suggest it could be a little higher. Around the 1.8% above inflation mark, but 1.1% works great for us because rounding it to 1 helps to keep things super simple)
Whilst the data only goes up to 2016 and we’ve had a bit of a tail wind behind house prices over the last few years, I think it’s pretty reasonable to expect something along similar lines in the future.
Now, you maybe thinking that doesn’t sound like much. Why do so many people like investing in property compared to some of the better alternatives out there. The big one of course being shares, which have provided more like 4-5% above inflation over a similar time period.
Whist I’m I big proponent of stock market investing that doesn’t mean I can’t see the allure of the property investment.
We are coming to what it is next.
The key to property investment
So up to this point we’ve established that property increases in price by just over one percent above inflation and that gold provides similar returns.
But there’s a large elephant in the room. Namely, leverage. Sometimes called gearing or other times – simply borrowing money.
Here’s the key.
Serious property investors don’t buy property with cash, they do it using a mortgage.
Not only can mortgages get you more bang for your buck, but they can also juice your investment returns. Let me explain.
Let’s say, you used £100K to buy a property.
If that property increases next year by 1%, that’s £1K in your pocket. Not bad considering you didn’t lift a finger.
However, you could have done better.
Typically, banks will lend you 75% of the price of the house to buy.
So what if you bought a £400K house using your £100K as a deposit and a mortgage of £300K from the bank.
A 1% increase on £400K in one year would be £4K.
In other words, by borrowing money from the bank, you’ve quadrupled your return without lifting a finger. Nice work if you can get it.
This is perhaps the biggest positive of property investing.
Though in theory you can borrow money to invest in gold, you can’t borrow anywhere near as much. The interest rate you’d be expected to pay for your loan would be higher and there’s a real risk of your lender asking for all their money back if the gold price drops too much.
Sure, the property market also crashes from time to time. The difference is, as long as you can make your monthly mortgage payments you won’t get into trouble with property investing.
Full disclosure, as an investor in property I can more or less guarantee that you wouldn’t really quadruple your return because there would be fees to pay. Mortgage interest being one of the bigger ones.
However, it would be a brave soul to argue that you wouldn’t get a big chunk of it. More than 2% one thinks. And remember any extra above 1% and your money borrowing puts you ahead of what you would have got with gold.
Not only that but there’s another big advantage to gold vs property and that’s rental income.
The icing on the cake
Whilst serious property investors highly appreciate and expect house price increases, they don’t usually rely on it.
Instead, they aim to make an investment return from rental income too.
Though it depends on the type and location of the property in question, in my experience, most property investors look for a gross rental yield of at least 4%. Some get much more by the way.
And whilst you wouldn’t get all of this due to fees, you could at least assume half of that ie 2%.
So now we’ve got an investment return coming from two places. We are getting returns from capital gains and income.
- 2% for the increase in house prices (juiced with leverage)
- 2% for our net rental yield
The equates to 4% vs 1% for gold.
Putting some numbers on it
If you invested £100K over a typical mortgage period of 25 years with returns of 1% annually you’d have £128K in the end, but if you got returns of 4% you’d have £266K.
And it’s worth just reiterating the fact that these are real returns above inflation, which has averaged 5% in the UK over the long term. If you added inflation into the mix you’d be looking at 9% property vs gold 6% which over 25 years would give you the following.
- £826K for property assuming 9% annual returns
- £429K for gold assuming 6% returns
It’s also worth saying that whilst I’ve based these numbers on historic returns there’s no guarantee that you’ll get anything like them in the future. Nobody knows what the future holds.
That said, it does seem pretty logical to me that over the long term they’d both hold value so the fact you can rent property out and use leverage to buy it does suggest that gold is going to have its work cut out beating property over the long term.
When gold makes sense
Whilst plenty of gold bugs out there that would disagree, I think it’s pretty clear that property is a better investment than gold if you let out your property and use a mortgage to buy it.
Though a lot of people do it, taking out a mortgage is not without risk. House prices do have a habit of crashing from time to time, and when they do you can find yourself in negative equity. In other words, you owe more to the bank than your house is worth.
To add salt to the wound, housing market crashes don’t usually come about without major problems in the economy and major problems in the economy have a nasty habit of causing people to loose their jobs.
That might be you or it might be your tenant. Neither of which would be good for your finances and either could cause you to loose your property or even go bankrupt. There are always some who do during crashes.
Will this happen? Probably not if you are careful and go into it with your eyes open, but just know there’s always the risk that it could.
Work Work Work
There’s also the fact that property rentals are essentially a business that require work. Even fully managed apartments in city centres have decisions to be made, forms to fill out, emails to reply to and problems to solve.
If you don’t want to work for your investment returns or don’t feel comfortable going into debt gold could be worth considering.
The gold market also crashes from time to time, but as long as you were in it for the long term you can simply wait for prices to recover because you didn’t go into debt to buy it.
Another reason to choose gold over property would be for diversification ie avoiding putting all your eggs in one basket.
Many people in the UK own their own home with a mortgage, and then borrow more money to invest in local buy to lets.
Great when the UK economy is doing well and property prices are going up. At other times, not so much. Problems in the property market could hit your home and your investments at the same time.
Investing in gold instead could help to spread your risk. Gold has a pretty impressive track record of performing well when other markets enter times of turmoil.
What about shares?
Now, that said, if you were looking for diversification away from property and didn’t already own shares, you might be better with those. At the end of the day, anybody with an investment account can buy shares in index funds and ETFs these days that spread your money out across the globe.
Comparing shares, gold and property all together would make this article more complicated than it needs to be. If you are interested you can read more about index funds and ETFs here, but the headline being, shares can provide similar returns to buy to let for most people without the work.
That’s not to say, people who put the work in to buy the right kind of property, at the right time, using leverage don’t have a great chance of doing better. It’s just that investing via broadly diversified index funds also gives good returns but without the hard work.
The bottom line
History shows gold and property have risen in value pretty much hand in hand.
Whereas you need a lot more pounds to buy a UK property than you did in the past, when you price housing in gold there’s been more or less no change.
And whilst this shows you can expect similar returns whether you choose gold or property, it ignores the fact that property investment utilises leverage and rental income to boost returns.
When you take these into account there’s only really one winner. Quite simply, we’d expect the returns from property to be considerably higher than those for gold.
Gold may be worth considering as part of your investments if you want to avoid taking on debt or don’t want to have to work for your investments or even if you just want to diversify your money away from property to reduce concentration risk.
But if you were only going to invest in one, you’d almost definitely be better with property.