Is rental property in the UK volatile for investment?

 

When we speak of volatility we are referring to the degree of variation in an asset when it’s price fluctuates.  The calculation to measure this is usually done by calculating standard deviation, which helps quantify the variance.

The most well known associations of these patterns are often seen in the financial markets whose multiple peaks and troughs look like epic mountain ranges. Amongst analysts the belief is long-term movements generally remedy any short term losses. For example if we look at the Land Registry Average House Price Index below from Oct 2007 to Aug 2017 we can see the after the property crash of 2007 the tenancy deposit claim birmingham house price index fell from 70.51 (Oct 2007) to 61.57 (Jan 2009) a fall of 12.7%.  However in the long term between Oct 2007 (70.51) and Aug 2017 (116.89) the house price index rose overall by 65.7%, which shows the short term annual fluctuations although showing drops in value in the long term, showed an overall rise in value. Which explains the reasoning behind the long term investor psychology to expect some negative losses in the short term but overall positive long term growth.


 As an investment, property has a reputation for being slow moving, because even though house prices may see rapid rises, the real time exchange of the housing stock is slow. The overall volatility of the financial markets are not mirrored by the property markets as the changes that take place happen at a much slower pace.

The stock market in contrast can drop by 8% in a single day, whilst over the last two years property prices have seen a positive monthly increase of 0.3% – much steadier and far less volatile.

The hype surrounding the media in their drive to make news stories more sensational by concentrating on the micro movements of the property market, rather than the long term picture is the underlying reason for people questioning market volatility. For example figures published this year had disclosed that house prices had fallen by 0.2% in May, 0.4% in April and 0.3% in March. The Guardian then published after analysing the data that house prices had actually risen from £207,699 to £208,711, which according to Nationwide is an all time record high for house prices in the UK.

In conclusion property is a much less volatile medium in comparison to the financial markets. Fluctuations are a natural part of long term investments, even if your property’s value was to depreciate slightly it’s rental income could hedge against any losses. This is what makes the property arena such an attractive proposition to investors.

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