Is it worth investing in property? What to know about the current market, and its potential for growth

Is it worth investing in property? This is probably a question that is on the minds of many investors at the moment. Over the last year or so, the property market has faced several headwinds in quick succession.

Since at least mid-2021, property investors and consumers alike have had to deal with a disastrous cost-of-living crisis. There have been many contributors to the rising costs we’ve seen in recent months. Chiefly – the invasion of Ukraine and Liz Truss’ mini-Budget pushed prices higher.

Inflation peaked at 11.1% in October 2022, and it took several base rate hikes to bring this all under control. But, these rate hikes filtered through to the property market.

As interest rates rose, so too did borrowing costs. What’s more, higher rates put house prices under pressure. The average UK house price in October 2022 was £291,496, according to the ONS. Since then, prices dropped and rebounded, with the latest figures showing an average price of £291,044.

Other house price indexes have shown consistent drops since early 2022. The average house price fell by 13.4% in real terms from its peak in March 2022 to now, according to Nationwide.

Fortunately, there are signs of recovery in the economy. Inflation is slowing, GDP is holding steady, and interest rates could start to fall from next year. For many investors, it may be worth re-examining the question of is it worth investing in property as we head into 2024. Especially as the property world has many things going for it as an asset class.

However, investors should seek out expert guidance before making any investment. These professionals can help make sure investor’s plans fit in with their circumstances, budgets, and long-term goals.

Diversification is key

No two investor circumstances will ever be the same. That is why professional, tailored advice should always be sought. But, many commentators and professionals believe that diversifying one’s portfolio can help protect long-term success.

Generally, it’s safer for investors to spread capital across a range of investments and asset classes, rather than putting all their eggs in one basket. A diverse portfolio could consist of a mix of equities, precious metals, bonds, and property.

Interactive Investor recently demonstrated how this works in practice. Utilising existing data, it showed how a portfolio would have performed between 2003 and 2023 if £140,000 had been invested evenly across 14 separate asset classes. So, gold, the FTSE 100, UK real estate, and more would each have £10,000 invested in them.

Over 20 years, while there were plenty of ups and downs, there was still a final pot of £784,189 – a 460% return. Comparatively, if the entirety of the £140,000 just sat in cash, only a 42.28% increase would be seen.

Investing in property, alongside other asset classes, has therefore been seen to bring benefits. Also, within the property market itself, there is potential for further diversification.

In the 10 years to May 2023, detached homes performed better than other residential properties. Growing by 74%, they outpaced the price growth of semi-detached houses, terraced homes, and flats.

There is also variation in the commercial property sector. Demand for office space has reduced in recent months, but leisure appetite is on the rise.

By investing across sectors and sub-sectors, investors spread their bets. If investments in American equities and bonds struggle, detached houses and leisure assets may pick up the slack.

Can healthy incomes be generated?

The question of is it worth investing in property becomes especially important when one looks at rental yields. Given rising costs, looming legislative changes, and general pessimism – landlords have struggled. Much has been made about BTL income falling, and landlords fleeing the market in recent months.

But, rental yields are performing relatively well in the current market. Especially when compared to yields from other asset classes. Analysis from Benham and Reeves showed that investing in the average UK BTL property at the moment may generate a gross yield of 5.3%. Comparatively, the current dividend yield on the FTSE 100 is sitting around 3.97% as of writing.

And of course, even greater yields can often be found in specific markets. Houses in multiple occupation (HMO), for example, are yielding around 8.1% on average at the moment for investors.

Landlords may be facing a difficult market. But there’s still opportunity to be found.

What about property prices?

Yes, property prices are under pressure right now. Is it worth investing in property with large immediate returns in mind? Perhaps not. But, as is the case with many investments, property tends to prove its worth over the long-term.

Rather than focus on monthly price changes, investors should perhaps instead plan with decades in mind. This is another area in which property also tends to outperform other asset classes.

Again, take the FTSE 100. Between January 1984 (the year it was founded and/or created) and August 2023, the FTSE 100 grew by nearly 600%. During the same period however, average property prices in the UK rose by around 1,037%.

Ultimately, there is no clear answer to the question of is it worth investing in property. The answer will always depend on circumstances, timeframes, budgets, and more.

Any investor planning to expand in the property market should do their research ahead of time, and consult with qualified professionals. But, should they choose add to their portfolios, we will be there with the specialist finance that may take their plans to the next level.