A 2% average real rise in house prices would nonetheless represent a lower rate of increase relative to historical average real UK house prices growth of around 4% per annum between 1984 and 2007 and around 3% per annum between 1984 and 2010.
Index-linked gilts currently offer a secure real return of around 1% per annum if held to maturity in 2020. Allowing for a modest net rental yield, housing bought on a buy-to-let basis may beat that with an expected total real return of around 3% per annum, but with considerable risk surrounding this central estimate. The PwC analysis suggests that the ‘90% confidence interval’ for housing returns over the period to 2020 ranges from around -1% to +7% per annum.
Equities might reasonably be expected to offer returns broadly in line with long-term historic average real returns, which (including reinvested dividends) were around 5.3% per annum on average for the UK over the period since 1900 according to the 2010 Credit Suisse Global Investment Returns Sourcebook by Dimson, Marsh and Staunton. Global average real equity returns were similar at 5.4% per annum on average over this period.
At present, equity market yields in the UK are around 3.3%, so a 5.3% real return would be consistent with real dividend growth of around 2% per annum, which is close to official Office for Budget Responsibility estimates of plausible trend growth in the UK economy over the next decade. Rounding down for caution, the PwC analysis projects an expected real equity return in 2010-20 of around 5% per annum. But the historic data also shows that equities are significantly riskier than housing, with an estimated 90% confidence interval of around -5% to +15% according to PwC estimates.
The analysis also considers, for the sake of illustration, a 50:50 mix of index-linked gilts and equities. This gives an expected real return in 2010-20 of around 3% per annum with a 90% confidence interval of around -2% to +8%, both of which are very similar to housing.
John Hawksworth, PwC’s Chief Economist, commented:
“There remains significant uncertainty in the UK housing market and it seems probable that it is set for a protracted period of relatively slow growth by historic standards. Housing is certainly a significantly riskier asset than index-linked gilts, although not as risky as equities.
“Our analysis suggests that, as an investment, housing is similar in terms of both risk and expected return over the next decade to a 50:50 mix of equities and index-linked gilts.”
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