Assessing the Risk of Investing in Property

By Sean Oldfield, CEO, Castle Trust

How risky is investing in UK property? It depends on whether you're investing in the housing index (historically one of the best performing assets on a risk-adjusted basis) or in an individual property (which is about five times as risky as the index).

Volatility is often used as a proxy for risk, and is a measure of the change of the price of an asset over time - if the price of something moves up or down significantly over short periods of time, it has high volatility; if the price is more stable, it has low volatility. The more volatile the asset, the riskier it is.

UK housing has historically had low volatility. The chart below shows the performance of the Halifax House Price Index (HHPI) and the FTSE 100 Index since the start of the latter in 1984. While the returns on housing and equities over the entire period have been similar at around 6% per annum, you can see that equities have been a lot more volatile. Not only are the price swings more extreme generally, but in the 2007-2009 fall, equities dropped by 47% (ref #1), peak to trough, while housing fell 22% (ref #2), peak to trough.

• Source: FTSE 100 - Yahoo Finance, monthly closing values from April 1984 to Dec 2012.
• HHPI - Halifax non-seasonally adjusted from April 1984 to Dec 2012

Does this mean that buying a house is safer than investing your money in equities? Not necessarily, because the risks of buying a single property are far greater than investing in an index representing all properties.

To use stocks as an analogy, the FTSE 100 rarely changes by more than 2% in one day (this happens, on average, just over once a month). However, individual stocks which comprise the FTSE frequently change by more than this each day, sometimes by a lot more, because of company specific issues. In other words, individual stocks have significantly higher volatility than the index. When the performance of the individual stocks is aggregated, the average change is a lot more muted. This is why most people choose to invest in funds rather than individual shares - portfolio diversification reduces volatility.

The volatility of the Halifax House Price Index is forecast by actuarial consultants Barrie & Hibbert to be less than one third of the volatility of a portfolio of UK equities over the next ten years, with similar capital returns. Distribution Technology state that "a greater return can be achieved for any given level of risk" by adding housing to a portfolio (ref #3).

Housing is the largest asset class in the UK, worth over £4,000 billion - more than listed equities, gilts, corporate bonds and commercial property combined - but most investors can't access it for their portfolio. Very few property funds invest in housing and any investment in buy-to-let involves a deposit, a mortgage and the costs and hassle of being a landlord.

Castle Trust HouSAs give investors access to the returns of the Halifax House Price Index (HHPI) over 3, 5 or 10 years.

Castle Trust Income HouSA tracks the returns of the Halifax House Price Index and also pays a fixed income of between 2% and 3% a year, depending on the term.

Castle Trust Growth HouSA delivers a multiple of any gains in the HHPI or a fraction of any fall over the chosen term.

So whichever HouSA you select, you are sure to outperform UK house prices, whether they rise or fall, and you can invest tax-free through an ISA, Junior ISA or a SIPP.

Click here to learn more about Castle Trust HouSAs.

• Ref #1: FTSE 100 Index capital return, source FTSE
• Ref #2: Source: Halifax capital returns
• Ref #3: "Castle Trust Strategic Asset Allocation Report", Distribution Technology, March 2012