How an £800 investment in property grew to more than £200,000
Investment property has been the best performing UK asset over the last 50 years. But just how good has it been? And has it beaten inflation consistently? As an investor, these questions are probably the most important you’ll ever ask.
In this article, we investigate why you need your investments to beat inflation, and we examine how investment property has stacked up against inflation, wages, and the stock market.
Inflation – the silent wealth killer
Inflation is the financial equivalent of high blood pressure. You don’t see it, you rarely feel it, but it will kill you if you let it.
If we think back to last year even, the price of goods and services doesn’t seem to have changed that much, despite the Brexit scaremongering. We only identify with the danger of inflation when we look back at our previous lives as children.
For example, a friend told me he used to receive pocket money of 50p per week. With that princely sum, he got his bus fare to town and back to go to the cinema on Saturday. It also paid for his cinema ticket, a bag of sweets and a soccer magazine. I don’t think you’d get much change out of £25 for the same morning entertainment today.
But forget about my friend’s childhood, let’s look at how murderous inflation is to your wealth.
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Looking into the inflationary crystal ball
There are two ways to look at inflation. The first is to consider what something will cost in the future because of inflation. The second is to consider the spending power of your money in today’s terms because of inflation in the future.
Today, the Bank of England expects inflation to remain around 2.5% for the next three years. So, let’s imagine that inflation remains at that level for the next 20 years. How much will your money be worth in 2042?
Let’s look first at how much a few goods and services might cost in 25 years at a steady 2.5% per year inflation:
|Item||Cost today||Cost in 25 years|
|Litre of unleaded petrol||£1.20||£2.22|
|Pint of beer||£3.40||£6.30|
|Weekly shopping basket||£70.00||£129.78|
|Annual council tax||£1,400.00||£2,595.52|
In terms of spending power, let’s say you were taking home £2,000 per month right now. The effect of 2.5% inflation over 25 years on your earnings would be like slashing them today to just £1,059. Could you live on that amount of money if you had to today? Here’s the spending power of money in today’s terms at a range of take-home earnings:
|Take-home earnings today||Equivalent spending power in 2042 after 2.5% pa inflation|
Three ways to beat inflation
Carry on working!
It might surprise you to hear (especially after reading about how wealthy my friend was in his childhood), but over the last fifty years, people have become very wealthy in the UK. The ordinary worker today earns comparatively way more than they did in 1966.
In the same period, total inflation has accumulated to 1,709%. That’s an average increase of around 5.75% per year.
In 1966, the average annual salary was £798.28. Today, it is £26,208. That’s an incredible increase of 3,283% – an average increase of 7.23% per year.
Providing you want to work for the rest of your life and wage rises continue to outstrip inflation, you’ll be wealthier when you retire than you are today. But do you want to work forever? I didn’t think so.
To beat inflation and get in a position to retire and enjoy the fruits of a long and hard-working career, you need to get your money to work for you. The question is, what’s the best asset to invest in?
Investing in the stock market has been a big winner
Stock market investment has done incredibly well over the last 50 years. Of course, there have been times when the stock market has been sharply lower. If you’d wanted to retire during these market downturns, you could have been a lot worse off than you had anticipated.
Stocks did most dramatically well in the late 1990s, as the dot-com bubble started forming. Then stock prices collapsed. In fact, even as late as 2010, two years into the longest ever bull market in stocks, the cumulative increase in stocks was no more than that of average earnings.
And, when measured against inflation, stocks were underwater until 1984. Only then would an investment in the stock market have beaten inflation.
Today, if you’d invested a year’s salary in stocks back in 1966, you’d have an investment pot worth around £32,910. Not bad… but not as good as it gets.
Investment property is the huge winner
Unlike an investment in stocks, property has never been behind the curve when measured against inflation on a cumulative basis since 1966. It only dipped below wages between 1992 and 1997. Stocks were in the ascendancy between 1992 and mid-2000, before the dot-com bubble burst.
During the course of 50 years, property investment has produced spectacular inflation-busting gains. If you had invested that 1966 wage in property, it would now be worth £45,845.
If you think this is good, wait until you see the real property investment return
- Because of consumer price inflation, something that cost £798.28 in 1966 would now cost £13,646.
- A person earning the average wage of £798.28 in 1966 would now be earning an average of £26,208.
- An investment of £798.28 in the stock market in 1966 would now be worth £32,908.
- And an investment of £798.28 in property in 1966 would now be worth £45,845.
But, let’s not forget that when you buy an investment property, you do so with the aid of a mortgage. You take advantage of the benefits of leveraging in property investment.
An investment of £798.28 in an investment property in 1966 would have bought you that property at the average house price of £3,586. You’d have borrowed £2,787.72 to invest (a mortgage of 77% of value).
Today that property would be worth £205,937. After you’d repaid the mortgage, your investment of just under £800 would now be worth around £202,500!
Or, to put it another way, that’s an average growth rate of almost 12%.
And if that’s not good enough, at the average rental yield of 5.6%, your investment of £798.20 50 years ago would now be producing a gross income of around £11,500.
50 years of UK property investment in pictures:
Contact one of our team today on +44 207 923 6100, and together we’ll start working towards uncovering a property investment that could give you inflation-busting capital gains and lifestyle-changing passive income.
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