Property, as well as the housing market more broadly, has long been considered a stable, yet lucrative investment strategy.
In much the same way, gold is another traditional investment asset that can allow for wealth protection, creation, and security within high inflationary environments.
However, these two investment avenues have undergone some readjustment, with the dream of homeownership seeming increasingly less attainable for younger generations. In the US, a report by Urban Institute found that those aged 18-24 were spending almost a third of their income on rent, while median house prices soared in 2021.
This is not just an example, but a signifier of a much broader shift currently playing out in the property market. In the first part of 2021, 15% of US homes were purchased by corporate investors – rather than families or individuals – leaving the average American citizen with less than a fractional chance of winning a home over an investment firm, like BlackRock.
So how do property and gold shape up as investment avenues?
Property – The Changing Landscape
Both property and gold have been termed as “safe-haven” investments, but with the ever-changing nature of the financial market, it is important to reassess this term.
Haven investments have the capacity to maintain or even increase in value during times of economic downturn. They are deemed to be ‘safe’ because their valuation trajectory is not necessarily correlated with ongoing stock market activity or the development of certain geopolitical events. While there is yet to be an investment entirely free of risk, the key is ensuring sufficient stability while also taking advantage of growth over time.
In the case of property, the financial crash of 2007-8 was enough to remind investors that even property, previously thought to be a safe-haven asset, can come under fire in certain, extreme market conditions. With the economic crash still in people’s recent memory, the Evergrande situation in China now threatens to create a domino effect similar to the repercussions seen after the ‘08 crash, or ones of an even higher magnitude.
With the property giant, Evergrande, now on the edge of default, the housing bubble in China continues to present a dilemma for property investors in the country. Property overvaluation in Hong Kong, for example, has surged to at least 46 times an individual’s average income. This gross overvaluation of property is not only an issue for the country’s domestic housing market, but also for overall GDP growth, and the global economy as a whole.
As for the situation in the UK, the housing dilemma is apparent, but for altogether different reasons. Some property experts have, notably, described the government’s net-zero strategy to decarbonise all sectors of the economy as a ticking time bomb. In all likelihood, property investment is soon to be hit by demands for clean technologies, in a move away from fossil fuel heating systems.
To meet the climate pledge, property investors are likely to see increased expenses of around £4,487 for a house and £2,256 for a flat, according to the Ministry for Housing, as the new green standard for homes is written into legislation. With increased barriers for developers and uncertainty around how the government plans to overcome this, property investors may need to begin considering other options for safeguarding their capital.
The Case for Gold
As for gold, the metal recently saw a remarkable 3-month-high, a significant win for the asset that has historically proven to be a safe haven for investors during times of heightened market turmoil. Speaking of all-time highs, gold recorded its highest price to date just recently in 2020, when the metal hit $2,067 per ounce on August 7. As geopolitical tensions and US inflation data are priced in, gold continues to push forward after a long stretch of quantitative easing policies seen during the pandemic.
It seems that long after US former President Nixon saw an end to the gold standard in 1973, and gold was no longer pegged to the value of the dollar, the precious metal can still presents investors with the key traits of a safe haven asset. In the ’70s however, investors were barred from trading in their fiat dollars for gold, making the precious metal less accessible to everyday citizens at the time.
Following this pivotal move, gold has increased in value by over 500% in the years since the gold standard was abolished, with central banks making sure that their reserves remain abundant. But it is only now that gold has been digitalised, that it has become infinitely more accessible, making it easier to buy gold in fractional amounts – trade it, and spend it, just like any other currency.
So, let’s compare property and gold in greater detail:
Wealth Protection – Is it inflation-proof?
In October 2021, the official annual inflation rate in the US was released, with the figure at 6.2%. More recently, inflation has now reached 7%, for the first since 1982, which marks the highest level of inflation seen in the US for almost 40 years.
With inflation no longer “transitory” as was previously declared by the central bank, but sustaining its remarkably high rate, investors are responding by seeking investment assets that store wealth and hedge against its damaging effects.
Danielle Di Martino notes that gold, historically, is the least correlated asset class in existence with inflation. More than simply offsetting its effects, gold has maintained a positive correlation with rising inflation rates, and achieved an average yearly performance of +10.6%, over the last 50 years. Gold has performed well in times of high volatility, in bear markets, and even outperformed the stock markets at times.
Similarly, rental property can also act as an effective inflation hedge in some respects. Property investors can generate a positive cash flow, most evidently, through letting out the property to tenants and earning on the rental income each month. Homeowners can adjust their rental income to overcome inflation rate spikes, however, this method can entail extensive negotiations with tenants. There is also the chance that inflation rates will rise faster than the rent can be reasonably increased.
In the medium-to-long term property or real estate investment is widely considered safe. However, this is mostly dependent on the local and global market conditions, with long term investment in real estate offering an average appreciation of about 3.8% in the last 25 years.
As mentioned, property is often deemed safe but carries the very tangible human risk of handling tenants, making it a highly involved investment at times. There are, however, more passive investments that can also present competitive returns.
Asset Valuation & Ownership
When investing in either property or gold investment, it is not financially feasible to simply “break even”. To ensure the investment is worthwhile, the outcome should be a sustained positive cash flow for the investor. Essentially, the cost of owning or controlling the asset, must not be higher than the financial output.
With property investment, for instance, there are high gains to be made. However, in order to fully realise these capital gains, the property must be sold. Notably, in December 2021, UK housing prices were on the up, with the average UK asking price for property standing at £340,167 – representing a 6.3% (YTD) increase over the past 12 months.
However, as existing homeowners will note, the sale-minus-buy price does not account for the numerous unrecoverable costs consistent with property investing: estate agent fees, mortgage, valuation, stamp duty, as well as maintenance costs for the property. Even for savvy investors, property investment can represent a double sting, with the potential to take money out, rather than add, to your pocket.
In some ways, gold historically featured similar attributes of costly fees for storage and insurance, with the addition of being cumbersome and impractical for daily monetary use – despite its capacity to store value.
However, investment in gold has recently become more accessible to the everyday investor, with the introduction of digital gold.
Companies such as Kinesis now offer investors the ability to store their physical gold, free of charge, in their global vaulting network. Investors have the ability to secure legal title ownership of physically allocated gold, as well as spend it like any other global currency.
Another aspect to consider in both property and gold investment is the yield-bearing potential of these assets.
In the case of property or real estate more specifically, the yield-bearing benefit is found by calculating the projected annual return for the property, as outlined below.
Rental yield = Annual rental income / Property value x 100
So, if the annual rental income is £14,400, with the property valued at £400,000 on the market, the rental yield for this property would rest at 3.6%. With the national average rental yield in the UK currently at 3.63%, anything over this amount is considered to be high.
While this yield is competitive, as mentioned earlier, the annual rental income must be adjusted year on year to account for fluctuations in pricing within the housing market, in addition to maintaining a continual balancing act with inflation levels.
While the yield on the property itself may be passive, this investment strategy is certainly not, requiring a high level of maintenance and attention on the part of the investor.
Is it time to rethink your investment?
It is becoming harder to find growth in the economic environment, as well as protection and liquidity. Clem Chambers comments that this is the real danger of inflation, making economies less stable and more fragile to economic shocks.
In times of high inflation, investors will generally favour yield-bearing assets, to offset the process of currency devaluation and the rising prices of goods and services.
Gold, which has been discussed at length, did not previously offer investors a yield, so many neglected to consider its stabilising effect on a portfolio, despite its historical appreciation and positive performance in inflationary environments.
Only more recently, since its digitalisation, are investors now considering gold once again, with companies such as Kinesis allowing investors, for the first time in industry history, to earn a usage-based yield on their gold bullion.
Paying no extra charge on storing their precious metals, insurance costs or account fees, users took home a yield on their gold investment, in addition to the asset’s significant appreciation over the past year.
So, with the impending economic repercussions of the pandemic now just coming to light, could gold be an option worth considering?
Thinking about gold investment?
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.