Gold Investment Vs Property Investment: Which One Is Best For You?

When choosing between gold and property as an investment, there is no one-size-fits-all answer. Both have their merits and drawbacks. Gold offers higher liquidity and lower entry costs, making it accessible to everyone.

On the other hand, property provides the potential for both capital appreciation and rental income but comes with higher initial costs and ongoing maintenance.

With all the benefits and disadvantages of both investments, it might be difficult to find the right one for your portfolio. But don’t worry – we’ll review all the facts and stats you need to make an informed decision to start your successful investment journey.

1. Recent Performance

Let’s start by comparing the performance of these two asset classes in the UK over the past 3 years.

Property Returns

UK house prices have seen annual growth of 1.7% over the past year. Key areas like London are seeing monthly price declines as housing inventory takes longer to sell, indicating a broader shift in momentum. This softening in property markets contrasts sharply with gold’s stellar performance.

The below chart from www.home.co.uk demonstrates the fact that housing inventory is lingering on estate agents’ books for around 7% longer than a year ago.

In comparison, gold prices have surged at around 8% per year over the past decade, significantly outpacing gains made in the property market.

With such strong and steady appreciation year after year, gold has clearly been the top-performing asset class versus housing in recent times.

Gold provides exceptional benefits as an effective inflation hedge and a store of value during periods of economic uncertainty.

From the chart below we can see that the average ratio over the past 70 years is around the 250 mark.  In other words, 250 ounces of gold would cost the same as an average UK house. The ratio peaked at around 700 in 2005, marking a period of soaring house values while gold floundered towards the back end of a long bear market.

With the average house price in the UK standing at around £285,000 at the beginning of 2024, and the gold price hovering around £1,600/oz,  it would take a mere 178 ounces of gold to afford an typical property. This reflects the dynamic whereby high interest rates have curtailed house prices for the first time in years, while the gold price has continued showing strength as a safe haven during uncertain socio-economic conditions.

Property

The high average house price of £287,546 makes direct purchase impossible for many everyday investors lacking such capital. Mortgages can help finance real estate investments, but lenders have tightened criteria dramatically in the last decade, requiring substantial deposits of 25-30%.

While the average house price hit its all-time high in November 2022 with £292,674 and has been slowly declining since then, this combination still makes accessing the property ladder a major hurdle for households.

However, you also need to consider costs such as estate agent fees, stamp duty or valuation of the property.

Gold

In contrast, gold has a very low entry point, starting from around £100 for an (admittedly tiny) coin or bar, making it far more accessible to the average investor. Improved distribution means physical gold coins and bars can be delivered in fractional amounts.

This affordability makes gold available across the wealth spectrum as a tangible asset. Gold provides a unique opportunity to begin investing from a small investment size.

Property

Liquidity depends heavily on housing market conditions. However, it also depends on other factors such as interest rates, credit availability, consumer confidence, and government policies. In key markets like London, inventory is taking longer to sell, indicating falling liquidity in property markets. But you need to keep in mind that the situation can be different in other parts of the UK.

Being part of fragile buyer chains further restricts the ability to exit positions quickly. This potential illiquidity can hamper real estate investors.

However, illiquidity can also create opportunities for investors who have access to capital and can take advantage of lower prices and higher yields in some markets.

You can also diversify your portfolio and reduce your exposure to illiquidity by investing in different regions, sectors, and asset classes.

Gold

In comparison, gold remains a highly liquid physical asset regardless of market conditions. Gold bullion can readily be sold back to dealers within days, providing excellent financial flexibility.

This easy convertibility to cash is a standout benefit versus relatively illiquid property assets. Gold provides peace of mind by acting as a form of cash during periods of market uncertainty.

Property

When it comes to property investment, the tax landscape is a labyrinth you’ll need to navigate carefully. Let’s break it down:

• Stamp Duty: Picture this—you’ve just found your dream investment property, and you’re ready to make it yours. But wait, there’s a catch! You’ll need to pay a hefty stamp duty, which can range from 5% to 12% of the property’s value that exceeds £250,000. That’s a significant chunk of change that could otherwise be invested elsewhere.
• Capital Gains Tax (CGT): Sold your property? Fantastic! But remember, the tax authorities are waiting in the wings to claim their portion. You could be looking at a CGT rate of up to 28% on your profits.
• Income Tax on Rental Earnings: If you’re earning rental income, you’ll be taxed at your marginal rate, which could be as high as 45% for higher-rate taxpayers.
• Restrictions on Interest Offsets: Recent changes have made it increasingly difficult to offset mortgage interest against rental income, leading to what experts call “tax leakage”—a slow but steady drain on your profits.

The bottom line? The taxman is practically your silent partner in property investment, and he’s not the generous type.

Gold

Now, let’s pivot to gold. Ah, the lustrous, timeless metal that has been a symbol of wealth for centuries. But did you know it can also be a tax-efficient asset? Here’s how:

• VAT Exemption: Imagine buying an asset and not having to pay any Value Added Tax (VAT). That’s gold for you! Investment-grade gold bars and coins are VAT-free, giving you an immediate saving right off the bat.
• Capital Gains Tax (CGT) Loopholes: Hold on to your seats because this is a game-changer. If you invest in British gold coins like Britannias or Sovereigns, they are considered legal tender. What does that mean for you? Zero capital gains tax when you sell. Yes, you read that right—zero!
• No Income Tax: Unlike property, gold doesn’t provide a regular income, so there’s no income tax to worry about. It’s a capital appreciation game, and you get to keep those gains (remember the CGT loophole?).

So, why is gold different when it comes to tax? It’s simple. The tax system is designed to favour certain types of investments, and gold ticks all those boxes. It’s like having a VIP pass to an exclusive tax-friendly club.

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As of July 2023, UK inflation, as measured by the Consumer Price Index (CPI) sat at an uncomfortably high 6.8%.

Despite falling from an incredible 26.7% in January 2023, this rate is still more than 300% above the Monetary Policy Committee’s (MPC) maximum target level.

This erosion of Sterling’s value acts as a significant motivation for investors to purchase gold as an inflation hedge.

The MPC’s response to the uncontrollable inflation levels has been to increase the bank rate fourteen times to the highest level for 16 years.

Hopes of an end to rate hikes have been tempered by suggestions of stubborn prices in various CPI elements. Even if rates only increase once or twice more, it’s unlikely they will come down again in the near future.

With a vast majority of property buyers requiring borrowing to purchase a property, this has severely impacted the cost of funding property investment.

For those seeking new investments into property, the current high monthly cost of a mortgage is ensuring that most plans don’t get off the ground, crimping much of the money coming into the property market.

This in turn has started to lead to property values dropping as demand falls.

The days of easy money in the early 00s witnessed an epidemic of UK house buyers taking out interest-only mortgages.

The idea was that the borrower could invest money in the stock market for the duration of the mortgage term and witness growth, which out-paced the amount needed to pay off the loan’s notional amount. This would leave them with a bonus nest egg to do with what they liked.

But when stock markets failed to make the expected gains, many households fell short of the amount they required. The consequence was that the Financial Conduct Authority (FCA) applied pressure on lenders to stop giving these mortgages out anymore. Nowadays, interest-only mortgages are only really available on buy-to-let properties rather than main homes.

We’re all enjoying our stocks going up in value in our pensions and ISAs. But all good things must come to an end. Analysing stock valuations over the past 150 years depicts bull runs lasting up to 6 years, immediately followed by a market correction.

The Dow Jones and FTSE indices are now enjoying their 9th year of rising prices, so the law of averages tells us that the downturn is overdue.

Maybe It Will Keep Rising Indefinitely?

An analogy would be the city of San Francisco. History and science tell us that being located on the San Andreas fault guarantees future earthquakes.

With many of the current residents having enjoyed years without a major quake, it’s naïve to suggest it will never happen. It will happen, we just don’t know when.

What we do know is the longer it goes without a quake, the bigger the damage when it does occur. The same can be said of stocks.

What’s the Outlook?

Each day, we read about more major brands either shutting stores, making redundancies or even going into administration.

This isn’t just small independent shops in the high street, but major mega brands such as House of Fraser, BT, Sainsburys & Asda, Toys R Us and Maplin.

On an evolutionary note, commerce is changing at the fastest pace for a century, with online giants like Amazon squeezing profit from physical stores and automation replacing human jobs.

This will only continue with technology.

Many market experts predict a major stock market correction with the Fed Reserve starting to raise interest rates in the US.

Closer to home, wages are stagnant, and credit bubbles are almost at bursting point with car leasing and zero per cent credit card deals.

What Would Be the Impact on Gold and Property?

When stock markets tumble, every investor feels the pinch, jobs are lost, and day to day income is impacted. This takes any heat from the stock market as fewer borrowers can raise the funds to move house or pay high rent.

This is also the very time that institutional and savvy retail investors switch their attention to gold. As a safe haven, it tends to receive a significant injection of investment demand during such market downturns.

Is it better to buy gold or property?

Honestly, there’s no one-size-fits-all answer. It really comes down to your specific goals and situation. Gold is great if you want an asset that’s liquid, low maintenance, and not tied to one location. Property can give you rental income plus appreciation but requires a bigger upfront investment and ongoing upkeep. My advice would be to consider your risk tolerance and diversify across both if possible. That’s worked well in my experience!

Is gold a good investment?

Gold can definitely be a smart investment. The key benefits are its inflation hedging abilities, portfolio diversification, and historically strong long-term returns. One downside is it doesn’t provide dividends, but I don’t solely invest for dividends. I look at gold as a way to offset risk and preserve wealth over time. It’s provided me peace of mind through volatile markets.

Why do people buy gold when inflation is high?

The appeal of gold during high inflation is that it holds its value better than normal currencies. When inflation kicks in, most money loses purchasing power. But gold has proven reliable at retaining its worth over decades and even centuries. As a limited resource, gold provides a solid store of value that isn’t eroded by inflation like cash savings might be. It’s served that role for people across history!