Shares outperform housing one-off or lasting trend?

Last year the stock market produced greater returns than the property market and in doing so it reversed the trend that has continued so reliably over the past five or six years. Ever since the bursting of the great dot com bubble, the UK stock market has been something of a rollercoaster ride until last year. The property market on the other hand was just gathering steam, with many buy to let investors pouring in to the market for a slice of the action.

During 2005, house prices rises failed to make it into double figures for the first time in five years. In fact it was also the first time this century that equity prices have outperformed house prices with the FTSE 100 rising by 16.7% throughout the year.

Since 2004, housing market commentators have been calling for a house price crash. However the crash, so far, has failed to materialise with the Bank of England claiming credit for achieving a 'soft' landing. Many experts have in fact reviewed their stance entirely with Roger Bootle of Capital Economics, for example recently ripping up his long held prediction that property prices would collapse by 20%. Nevertheless his revised forecast of a 5% decline in house prices over the next two years keeps him at the bearish end of the forecasting spectrum.

Couple this with the latest mortgage lending figures, and an appetite for property has certainly reappeared. In total, 122,000 mortgages were approved during December, larger than any month since May 2004. A rise in mortgage approvals is usually seen as a sign of strengthening in the housing market and it may well be for this reason alone that the Bank of England's Monetary Policy Committee hold fire on presenting us with a further quarter percentage point interest rate cut just yet.

Yet with the majority of market reports from lenders such as Halifax and Nationwide predicting house price growth of no more than 3% over the next couple of years it appears that the stock market offers a much more reliable option for increasing returns.

Shares - a risky business?

With the stock market currently rising steadily and continuing its march towards the 5,800 level, it could be that those experts, who expressed visions of the FTSE 100 reaching the 6,000 level, may not be too wide of the mark. However, relying on the so-called expert forecasts can be a risky business.

Brokers expected a 6% rise in the FTSE to 7350 in 2000 the market actually fell 10%!

In 2001, they assured clients there would be a 17% rise to 7250, but the index plunged 16%!

A poll of brokers in 2002 by L&G found the average prediction was for a 13% rise that year the market fell 23%!

Burnt by previously bullish predictions, analysts were cautious for 2005, but the FTSE 100 outperformed most expectations. With tens of thousands of private investors shunning the stock market in recent years in favour of buy to let properties, many lost out on last years shares rally.

Merger mania continues to sweep through the market and the FTSE 100 appears to be climbing steadily. A bidding war is underway for P&O, even the London Stock Exchange itself is being targeted. Foreign firms spent an astonishing £33 billion buying British companies during the first three quarters of last year alone and this amount of money just goes to reiterate the confidence felt within the walls of the Square Mile.

According to the Association of Investment Trust Companies, 47% of those interviewed believe the FTSE will end the year between 5,500 and 6,000, with 27% expecting it to rise above that level.

One warning note about the one area of downward pressure that the stock markets will continue to feel and have to absorb. The cost of oil and gas are both continuing to flicker around historical highs. However, as long as investors remain realistic about growth prospects, then a healthy 6-7% return from the stock market would be only too pleasing and should, if the experts are correct (sometimes they are), exceed returns from property!

06 February 2006 © Moneyextra.com

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