Gold investment versus Property – is property losing its shine?

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Physical Gold Investment and property are good places to start

As keen investors know, there are two key rules to adhere to when investing:

1. Only invest in things you understand

2. You have to be lucky with timing.

Certainly I stick with the first rule religiously, which is why I’m a big fan of both physical gold investment and property. They’re both simple, tangible assets, with an intrinsic value.

And whilst I agree with the second rule – that there’s always an element of luck involved, I also believe intelligent, strategic thinking can vastly improve your chances of great timing.

Recent property and gold performance

If we compare the performance of these two asset classes, in the UK over the past 3 years, PHYS01_Animated_Gif_2_MPUthere’s a clear winner. In the UK, gold has dropped around 45% in value since its peak in 2012 whilst property owners have seen double-digit annual returns, especially in London. Factor in the added bonus of rental income, and it becomes obvious why so many investors have chosen Buy-to-Let properties over the past few years.  So it seems there’s no competition – property is the winner, with no signs of the UK house market juggernaut slowing anytime soon. Gold seems to be treading water at best… But look below the surface and there may be a number of factors about to change all this.

If you’re a property fan, considering adding to your property portfolio in the next year, you may instead wish to consider investing in Tax Free Gold.

There are 4 major threats that will affect the UK property bubble:

  1. China woes

The biggest overseas buyer of UK property in recent times has been the Chinese. They’ve not only been the catalyst for UK property price increases, but almost single-handedly provided momentum to the global economy. It’s not uncommon to hear that an entire block of new flats has been sold within weeks, mainly to the Chinese market.  But cracks have started to appear in the world’s second biggest economy, forcing the Chinese central bank to devalue its currency on a number of occasions this year. Stock markets have already reflected the growing concern and accepted that the Chinese bull-run is possibly coming to an end.  If, as expected, Chinese demand for UK properties wanes, then we’re likely to see the heat from the market dissipate. China’s size (it contributes more than 13% of global GDP), means a shrinking economy will also impact every other region around the world – further curbing demand for UK buy-to-lets.

  1. New legislation around greenbelt land

Supply and demand play a key role in both property and gold. With property investment it’s reassuring that, here in the UK, we have the equation of an increasing population and very limited space to build new houses. Similarly, gold’s demand continues to increase, whilst supply is extremely limited, due to no major discoveries in the past 15 years.

However, the squeezed housing supply, currently pushing up UK prices, could be about to explode. Many affordable housing projects are already underway. But it’s the biggest shake up of protected green belt land in 30 years that will provide the catalyst to a surge in UK housing stock.

If the proposal to build thousands of new starter homes is approved, it could play a huge role in alleviating the current supply shortage.

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  1. Stamp duty rise on buy-to-lets

Whilst property supply may increase, the Government is also determined to hamper demand in a desperate attempt to prevent another financial crisis. In the last few years, the budget specifically targeted UK property investors – adding a huge 3% extra stamp duty for buy-to-let investors starting in April 2016.  This applies across the valuation board and will need to be paid in addition to the current stamp duty rates. This equates to an additional £15,000 stamp duty on a purchase of a £500k property.  This additional upfront tax burden may put off those looking to enter the market or those wishing to add to their current property portfolio.

Post the 2008 financial crisis, banks are now increasingly tight-fisted when it comes to giving out generous mortgages on buy to let properties. Not only is it difficult to get a buy to let mortgage, recent budgets have witnessed reduced tax breaks for buy to let investors, making the asset class less attractive for investors.

  1. Reduced tax breaks

If that wasn’t enough, new legislation already passed, will impact the income received for all UK buy-to-let investors. Currently investors are able to offset much of their rental income against their mortgage, meaning little or no income tax on the investment. However, this benefit is now being phased out over the next 3 years, so anyone owning investment properties will face significant rises to their tax bill. This will not only deter new investment into the market, but may also see existing owners sell to avoid the tax hike.

5.  Increased uncertainty over Brexit

The looming uncertainty over Brexit is also a cause for great concern when it comes to property market investments. As the gates close for new immigrants, property market demand is likely to be affected causing volatility in the real estate market. The UK house price index as of November 2017 declared £226,071 as the average house price. However, it is important to note that these prices are hugely impacted by London property prices, including that of prime London properties. It is important to understand that the average price in itself is not indicative of a strong market. In fact, experts believe that the market is actually weak and that the prices are held up by a lack of supply of suitable housing, a key factor we have discussed earlier on.

physical gold investment
Brexit concerns and fears impact gold prices and confidence

How does physical gold investment compare?

No one can deny that gold has suffered since its peak in 2012. But as mentioned earlier, timing and cycles make a huge difference on your returns.

Whilst the property market is pushing new highs, gold has currently climbed up from a 6-year low to around $1330. While the prices could rise or fall in the coming months, the odds are convincingly in favour of now being a great opportunity for physical gold investment.

With buy-to-let investors to be hit hard with the fiscal stick, it could see many of them moving some money away from property and into physical gold investment – which has no such tax penalties.

Indeed, the tax burden for buy-to-lets is looking daunting. Stamp duty is set to rise when you buy property, income tax is increasing while you own it, and capital gains tax will apply when you sell. In contrast, tax free gold is VAT exempt, attracts no income tax and is capital gains tax free.

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Yet another problem faced by investors when investing in real estate is the problem of liquidity. Properties take time to sell and one has to go through the entire process, which could take months. The property owner also needs to deduct the costs of selling from the overall gains made on the sale. The rising costs of maintenance are another cause for concern. Landlords who own buy to let properties are saddled with brokerage costs of finding a steady stream of tenants, as well as costs of upkeep of the property, including landlord insurance, which every landlord needs to bear according to the law. Consumer price index inflation over the years in the UK has left first-time buyers with a reduced share of wallet, leaving many unable to qualify for a mortgage or afford one. All of these factors play an important role when making a decision on whether or not to invest in the property market.

The Chinese market issues are likely to negatively impact UK property values, but they could be a catalyst for gold.  Historically, gold has profited during economic downturns. Combine this with the current heightened terror threats and the ailing Euro region, and gold could feel the wind in its sails for the next couple of years.

The great thing is that you don’t need to choose between property and physical gold investment. If you’re already a keen property investor, then it may be worth taking your first steps to gold investment to hedge your portfolio. As we’ve seen, possible threats to one asset class can be a benefit to the other. That way the two investment rules are met: property & gold are simple, tangible assets and timing becomes less of an issue if you own both.

Is gold investment for you?

If you have decided gold investment is for you then look no further than Physical Gold. Why not call our experts on 020 7060 9992 today?

Image Credit: Daniel Diaz Bardillo

 

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