Should you have invested in gold instead of real estate 20 years back?
Before you read any further, let me clarify that I’m not a financial advisor by profession. I “do” finance out of personal interest. This article should not considered as a recommendation or advice on investing.
So, last month I was asked to speak at a friendly gathering of friends about personal finance and investing. This was a group of respectable Indian immigrants to the UK who were well settled and well earning families. Obviously I wanted my talk to be relatable and of value. And thus started my preparation for it.
I had recently read in a book called “Diamonds in the dust” written by Saurabh Mukherjea and team about the “Indian Household Finance Survey” done by Reserve Bank of India in July 2017. In its first chapter the report states that
The average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold and the residual 5% in financial assets.
You can read the complete report here.
This did not come as a surprise to me as I myself “qualify” as average Indian household and to the best of my knowledge the stats also hold true for all my friends in India! I went on to research more about Indians and owning real estate in the UK.
And, I was surprised to read this Home Ownership report on gov.uk which states,
68% of White British households owned their own homes, compared with 74% of Indian households.
You can read the complete report here.
And it dawned on me that Indian households have carried their preference of investing in real estate to the UK as well! Firstly, they have surpassed the White British households in terms of owning their homes. And secondly, investing in real estate is almost a second nature to them. This explains why most of my Indian immigrant friends own not only the homes they live in but also houses which they have let out for rent.
So, real estate seemed like an asset class my Indian friends would definitely be interested in knowing more about. Real estate has its own advantages like it’s so tangible that you can see it on google map! It can generate a steady monthly income and is hard to steal. Owning several real estate properties is also a tremendous ego booster.
But personally, in my humble journey of investing and financially educating myself, I’ve started to see the “not so rosy” side of investing in real estate such as low liquidity, high transfer costs like stamp duty, registration fee and brokerage. In a city like Pune, at 6%, you will be paying a stamp duty of 6 lakh to buy a house of 1 crore.
So I thought why not compare the top two favourite investment classes of us Indians and see who wins the ultimate battle of being a good asset in the UK. For this, I did a case study to find out which asset performs as a better store of value for an investor’s money. For the real estate asset I considered UK’s most loved configuration of a home i.e. three bed semi-detached house and on the other side I had gold bars of fixed weight.
For ease of understanding, let’s assume Mr. A decides to invest in real estate and Mr. B decides to buy gold bars.
Assume we have Mr. A and Mr. B both living in the UK in year 2000 having at their disposal good amount of cash. In March 2000, Mr. A decides to buy a three bed semi-detached house in a residential area in the south of UK. Digging a little bit through websites like zoopla.com one can find historic prices of houses in a specific area. Let’s say Mr. A buys this house at 143,000 GBP. At the same time Mr. B with his 143,000 GBP decides to buy gold bars. As per gold.org, price of 1 oz of gold in March 2000 was roughly 183.88 GBP which gets Mr. B roughly 777.68 oz of gold. To keep things simple let’s not consider costs involved in buying these assets for example, stamp duty, registration fee or transportation cost, etc and any other cost like maintenance costs for the house. However, readers would appreciate the costs involved in buying a real estate asset are much more than costs involved in buying physical gold.
Fast forward 23 years, in March 2023, the price of Mr. A’s house has appreciated to roughly 450,000–550,000 GBP (source zoopla.com). This seems like a fair appreciation. But do you want to know how much Mr. B’s gold bars are worth in March 2023? Take a guess (or use a calculator, duh!). It’s a whooping 1,088,753 GBP!
Are you not blown away by this difference? I mean think what kind of house Mr. B can buy today with this money 🙂
One might argue- what if Mr. A lets out this house and earns rental income every single month of these 23 years? Let’s find out how much that would be. We are going to make some assumptions here for limited availability of rental data. Say, Mr. A earned 800 pounds every month for the first 8 years (800 x 12 x 8 = 76,800), 1000 pounds for the next 10 years (1000 x 12 x 10 = 120,000) and 1400 pounds for the last 5 years (1400 x 12 x 5 = 84,000) giving him a total 280,800 GBP in rental income. Add this to the current price of house ( 550,000 + 280,000 = 830,800) and still Mr. B’s gold bars’ value is much more than Mr. A’s total gain on real estate.
And that’s not all, Mr. B can make the most of his tax-free capital gains allowance by spreading the sell of his gold bars through multiple years unlike Mr. A who will need to pay tax on the entire gain in one financial year. If we put it in numbers, Mr. A’s capital gain would be roughly (550,000 – 143,000 = ) 407,000 GBP less costs incurred in buying and selling the asset (say 10,000), tax-free capital gains allowance 6000 GBP, ie 391,000 GBP. So depending on which tax bracket Mr. A is he will either pay roughly 70,380 GBP (18%) or 109,480 GBP (28%) in capital gains tax.
To top this even further, did you know,
You pay 8% more tax on capital gains from residential property than other type of asset. (See https://www.gov.uk/capital-gains-tax/rates)
Although I do not suggest that one should sell their house to buy gold bars, I definitely want to bring your attention to how historically gold has proven to be a great store of value and should get it’s respectable share in one’s investment portfolio.
These days there are various alternatives to buying physical gold. If you want to benefit from the rising prices of gold, investing in Gold ETF and companies which mine gold could be an option. Usually, the share prices of such companies rise as gold prices rise.
Getting good returns on gold is also subject to the currency you are buying gold in. For example, gold may give better returns if you are spending let’s say INR to buy gold versus if you are spending USD to buy gold. Rising inflation causes the value of money go down but the prices of gold to go up.
So, back to my first question — Should you have invested in gold instead of real estate 20 years back? Well, I leave it to you. And with this I rest my case ladies and gentlemen!