Deciding on the right investment is a case of timing and circumstance. Right now, the property market is frankly in turmoil and there may be many more months of decline on the horizon. Is property the right investment for your circumstances? Is gold a better fit? Are they mutually exclusive?
Rampant inflation and surging interest rates around the world have had a knock-on effect on property markets almost everywhere, according to the Knight Frank Global House Price Index. Prices growth is either slowing down, or prices are already falling, some by more than 5%.
The property market in mid-2023
In the UK, interest rates rose for the 14th consecutive time in August, with rates now at 5.25%, a huge leap from just two short years ago when rates were just 0.1%. While the property market had been propped up post-pandemic by government incentives like stamp duty holidays, the rapid rise of interest and mortgage rates has quickly put the brakes on property price rises.
Prices started to decline around a year ago and have been falling ever since. The most recent figures from Nationwide showed house prices down 3.8% in July. There are different forecasts in the market, but none view this as the bottom, there is still further to fall. How far and how fast is impossible to know, but the Office for Budget responsibility predicted in its March 2023 forecast that house prices will decline by 10 per cent from their high in the fourth quarter of 2022.
“Low consumer confidence, the squeeze on real incomes, and mortgage rate rises are expected to contribute to continued falls in house prices.”
The long view
So, does a slump in the housing market negate investment in the sector? Only in the short term. While current property market turmoil may be dissuading some investors, property is still a feasible long-term investment option for many people. Aside from a few intermittent declines during economic downturns (2008 in particular) the underlying value of property has appreciated consistently over time.
For many people property is their largest investment, but second homes or rental properties are also a popular investment choice. The capital appreciation can be coupled with rental income to increase the value of the investment.
Some consideration needs to be given to the location of the property. Buying into an up-and-coming neighbourhood can substantially accelerate the increase in property value, but then it’s not always easy to predict where these might be. Location also affects the pace at which values rise. London and the South East are particularly strong markets, slow to lose value when a downturn occurs and on the higher end of the growth spectrum when the market is strong. However, it’s very expensive to start with, which can be a deterrent. Meanwhile location will also affect rental returns, although this is usually reflected in the price of the property.
Property is an illiquid investment but has a strong history of capital appreciation and can generate rental income (although this requires management). Long-term it’s a feasible investment choice, but it may be prudent in the current climate to wait a little before buying.
Gold Investment now
The market for gold at the moment is relatively stable. There have been peaks and troughs, with the gold price as high as £1650 and as low as £1490 in the last six months in sterling terms. In early September it was around £1530, largely unchanged on the previous six months. Comparably, gold has risen around 5% over the past year, and 65% over the past 5 years.
And for the rest of the year? The World Gold Council’s mid-year outlook for gold is a mixed picture. Many of the possible outcomes depend on what happens in the global economy. The gold body believes that if the global economy deteriorates and the risk of recession increases, more people will turn to gold, supporting a rise in price. However, if there is a ‘soft landing’ and a US recession is largely avoided, gold could remain ‘neutral’.
Forecasts by analysts, investment banks and gold investors cover a wide range of outlooks, but many expect the price to continue to rise this year. With US dollar prices in August around $1,940 an ounce, Citi analyst Edward Morse told CNBC he predicts the price will rise to $2400 this year, while UBS analysts forecast $2,100 by year end and $2,200 by March 2024.
The long view
It is possible to speculate short-term on the movements in the gold price, but it is risky and really only suitable for experienced speculators. Rather, investors should consider following the lead of institutions and central governments who hold gold for a long time, riding out the peaks and troughs of the daily gold price to enjoy the long-term growth that gold has maintained over centuries. It is recognised as a safe-haven asset, rising in price along with other goods and maintaining its long-term value even when other investments fall. This safe-haven status means it is often an effective hedge against market volatility, and a useful diversifying tool within an investment portfolio.
Importantly, gold is a very liquid asset. It can be sold quickly (especially when bought from a broker that provides a Buy Back Guarantee, such as Arabian Pure Gold) to take advantage of opportunities in other asset markets. It is also capital gains tax-free under certain circumstances, and VAT free when investing in certain types of gold.
Property vs Gold now
The current state of the property market is making many potential buyers pause. The cumulative effect of the cost-of-living crisis, rapidly rising interest rates, rapidly rising mortgage rates and falling house prices doesn’t paint an optimistic picture. While long term property growth is expected, it may be a prudent option to wait until the market recovers before buying bricks and mortar.
In the meantime, gold remains largely stable and has a strong history of hedging against inflationary pressure. If the economic pressures continue to dampen the UK outlook, gold’s safe-haven status could also come into its own and help protect your assets while the property market recovers.
