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Property vs Gold: Which is the Better Investment for UK Investors

Property vs Gold

Figuring out whether you should invest in gold or property is a pretty challenging task, particularly in today’s unstable macroeconomic environment. It’s almost impossible for the average investor (or even professionals) to account for all the costs and risks when making decisions. The 2020s is an era of profound uncertainty, and clarity on the future is hard to come by.


Factor
 
Gold Property
Consistent performers
Gold prices have historically tracked UK inflation. Gold demand is global so less tied to UK economy.
 
UK property prices have steadily increased over decades, but can be more susceptible to downturns in the UK economy.
Inflation Hedge
Gold typically holds value during inflationary periods in the UK.
 
Inflation can drive up UK rental incomes, but higher rates also increase mortgage costs.
Income
Gold does not provide income for UK investors.
 
UK property can generate rental income but comes with landlord responsibilities.
Taxes
No capital gains tax on gold coins like Sovereigns and Britannias in the UK.
 
Subject to capital gains tax when selling UK investment property.
Costs
Low purchase costs for UK gold buyers.
 
High transaction costs for UK property like stamp duty. Ongoing maintenance costs too.
Leverage
No leverage available when buying gold in UK.
 
UK mortgages allow up to 95% loan-to-value ratio. Enhances returns in appreciating market.
Liquidity
Gold is liquid asset in UK market.
 
Selling UK property is an illiquid process taking weeks or months.
Investment Options
Physical gold, gold ETFs, gold accounts available in UK.
 
Residential, commercial property, REITs in UK property market.
Storage
Secured vault storage required for large physical gold holdings in UK.
 
No storage needs for UK property investments.
Diversification
Gold diversifies UK investors away from pounds and UK assets.
 
Property diversifies portfolio of UK stocks and bonds.
Future Outlook
UK gold demand expected to rise amid inflation/recession fears.
 
UK property market outlook depends on mortgage rates, economy, supply-demand dynamics.

Property And Gold Are Both Consistent Performers, But Could That Change?

Historically, gold and the property market performed consistently over time. In the sound money era before the 1970s, both tracked inflation and responded to productivity improvements in real terms.

Today, though, the situation is different. Property decoupled from underlying earnings, and prices rose tremendously. The Case-Shiller index, which standardises house prices based on average wages, increased from a base of 100 in 1992 to more than 500 by 2022, a five-fold increase above the historical support level. Property owners got rich, but at a cost. Today, they rely on cheap credit to fund the bubble. If that dries up, buyers will not be able to take out large mortgages, and prices will necessarily fall.

You could argue the same is true of gold. Credit expansion over the last twenty years forced up the gold price too. However, the situation is different. Investors do not buy gold with credit. Therefore, they are not dependent on low-interest rates to fuel the price. Moreover, the prospects for gold are good because of the extreme levels of debt now in the system. Central banks are unlikely to let a deflationary episode run its course, so the nominal value of gold will likely continue to accelerate.

How Inflation Could Help The Gold Price Increase

How Inflation Could Help The Gold Price Increase

Inflation and gold’s short-term relationship is pretty loose. Inflation could spike, as it has recently, and the gold price will barely budge.

Over the long run, though, it’s a different picture. Historically, gold prices have reflected the grand scheme of inflation in the fiat money supply, even if there are lumps and bumps along the way. That’s because gold retains its status as real money, even if governments try to argue otherwise. A de facto gold standard is still with us despite central bankers’ denial.

You sometimes hear professional investors saying things like, “gold is not an investment because it doesn’t generate a stream of profits.” And that’s true: the precious metal isn’t like a company or buy-to-let property.

However, the motivation for this argument arises from the post-war regime. Since the 1950s, stock prices rose and companies as a whole consistently delivered profits. Share prices reflected those earnings, compounding returns for investors.

Today, we are moving into a new regime characterised by minimal growth and high rates of credit expansion for debt servicing. In this environment, firms as a group will perform poorly, and gold should do well, just as it did in the 1970s when it returned 32 per cent per year.

Is Gold A Better Investment?

When you take this view, the argument for gold becomes compelling. Prices are much more likely to rise relative to housing because of the rising cost of credit in general and mortgages in particular.

However, there are other reasons why a gold ETF or bullion makes sense. For instance, there are minimal transaction costs when buying gold. You pay a small fee above spot.

Housing, by contrast, comes with enormous expenses. Stamp duty, deposits, valuation fees, surveyor fees, legal fees, transfer fees and estate agent fees can all combine to a whopping 50 per cent of the purchase price.

Property also requires ongoing expenses. Most owners pay around 1 to 3 per cent of their home’s value on maintenance every year, cutting into their returns tremendously. Therefore, house price indices do not reflect the net return on investment.

How To Invest In Gold

As an investor, there are several ways you can put money into gold. Gold bars are one option. These allow conversion of a substantial investment into a small volume asset.

You could also consider gold coins. The UK government considers UK gold coins, such as Sovereigns and Britannias, produced by The Royal Mint to be 'legal tender', meaning they are free from capital gains tax. Even if the price rises tremendously, you won’t have to forfeit any of your returns.

Gold ETFs are another option. These let you purchase gold without taking physical possession of it. Third-party firms secure the gold in vaults and then issue shares based on their holdings but this arrangement creates third party risk in the investment.

Conclusion

Ultimately, physical gold bars and coins can be considered to be a better investment for in the UK for the reasons listed above. The current macroeconomic regime appears to be working in favour of precious metals and against housing.


Article Last Updated: Wednesday, February 1, 2023