Why do we always get mixed messages from the business pages of quality newspapers? House prices are going up. High street spending is good. Retail prices are declining. Unemployment is down. High salaries are being earned. Individually we are all in good shape. Or are we? Shares are down! Pensions depressed! Annuities are lower! However it is better than the early 1990s when short-term interest rates were 15%, ten year Government bonds paid more than 9% p.a. and dividends from the largest UK blue chip companies were 5%.

In September 1992 the Pound was forced out of the dreaded Exchange Rate Mechanism that supported the high interest policy of the German Bundesbank. The greatest Bull Run in history ended in March 2000. Shares soared by more than 1,000% between 1982 and the peak in December 1999. A couple of months later, the tech bubble burst and equities began their long slide.

Today the major stock markets remain volatile and are predicted to remain so. It is widely accepted that America leads the world’s economic growth. The FTSE seems to follow the NASDAC like a shadow and September the 11th hangs like a cloud over us all. Volatility makes share price predictions impossible.

The same applies to house prices. One day it is announced that house prices will go through the roof. The next day they are about to crash. Can you believe anything the property experts claim? Try to gain enlightenment from Private Eye’s headline ‘House Prices Slump to Their Highest Level Ever’. The truth is that nobody knows whether house prices will go up or down.

There is a bullish case. When interest rates are at their low level and when not enough new homes are being built to meet demand, money will continue to flow into bricks and mortar as people come to realise what a poor return they have received on their shares and building society accounts. There is a bearish case. Property is echoing the dotcom bubble – the market is being driven up by fad and fashion, and bust will inevitably follow. Speculation it may be but it is notoriously hard to predict.

Should You Buy Property Or Shares?

Deciding whether to invest in property or shares has never been more difficult. Since 1982, shares have been the star performers. The average property has increased in value by 319% while shares have risen more than 600%. Over ten years share prices went up by 142% compared with a 96% growth in property prices. Only from 2000, when the tech bubble burst, did property beat equities.

However, over the long term the picture is more even. In the past 50 years, house prices and the stock market have risen by almost exactly the same amount on an averaged annual basis. Houses have increased by an average of 8.2% per year and the capital value of shares by 8.3% per year. If dividends are taken into account, however, shares have an advantage.

History suggests that markets and assets move in cycles, in which case house prices and share prices will at some point converge again. The question is whether they meet because house prices fall or because shares go up.

This demonstrates a need for a balanced portfolio.

Property

More people are buying their own homes than at any time since the late 1980s. They are concerned that if they do not get on the property ladder soon, property will become too expensive. The outlook for the market appears fairly sound.

The population is growing but fewer homes are being built than at any time since the 1930s. When demand outstrips supply, prices usually rise. The increase in the number of single owner-occupiers has further boosted demand. Interest rates are low, so homes are more affordable.