Does pension beat property?

Andy Haldane grabbed a few headlines recently when in an interview with the Sunday Times he suggested his favoured investment for retirement savings was residential property. It is a view many people with a less profound understanding of economics would share, as evidenced by the popularity of buy-to-let property as an investment. Mr Haldane’s main justification for choosing property was that in the UK demand has consistently outstripped supply, which to an economist means prices can react only one way – “relentlessly heading north”. 

In practice, residential property prices have not always increased. The market is cyclical – like most markets – and if you invest at the top of the cycle (e.g. the third quarter of 2007) you can wait a long while (e.g. until the second quarter 2014) before you see any capital growth, even if you ignore expenses. 

Moreover, the government is intent on raising those expenses: the list includes an additional 3% across each band of stamp duty land tax (land and buildings transaction tax in Scotland) for all second homes including buy-to-let properties, a phasing out of higher rate mortgage interest relief, a less generous allowance for replacement of furnishings and a higher rate of capital gains tax than applies to other asset classes. But the best reason for not increasing the weighting of property at the expense of other asset types as part of your retirement planning was recently given in a speech by one of Mr Haldane’s former colleagues at the Bank of England, Andrew Bailey. He was once a Deputy Governor and is now the Chief Executive of the Financial Conduct Authority. 

Shortly after Mr Haldane’s interview appeared, Mr Bailey gave a speech in which he looked at “the two big investments in the life cycle model – a home and pensions”. He said that the main problem with buying residential property instead of a pension was the lack of investment diversification. In other words, owning your own home probably gives you enough exposure to the residential property market, not just in terms of asset value but also in terms of the amount of money you invest in your own dwelling over a lifetime. In any event, it is important to take individual advice based on your own particular situation.   

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as long-term investment and should fit in with your overall attitude to risk and financial circumstances. Buy-to-let mortgages are not regulated by the Financial Conduct Authority.