Mar

2

 Soaring UK property prices, especially in Greater London, have motivated me to investigate these growth rates in more detail. The initial question at hand was to see whether house prices UK-wide or in Greater London have beaten the FTSE100 performance over the last years. Based on the Halifax House Price Index, RPIX and annual FTSE100 return data between 1986 and 2006. I have come to surprising conclusions:

First, all annual return rates (UK properties, Greater London properties and FTSE100) do not significantly differ between each other either in nominal or (real) terms: average annual returns are +8.3% (+5.2%), +8.6% (+5.6%) and +8.4% (+5.4%) respectively.

Second, given the difference in price volatility, both UK-wide and Greater London have outperformed the FTSE100, both nominal and real. The annualized nominal (real) standard deviations each are: 1.9% (2.0%), 2.2% (2.5%) and 3.3% (3.2%).

Third, although properties in London may appear more attractive than in other parts of the country, Greater London returns have exhibited a slightly inferior return-to-risk ratio, both in nominal and real terms. I found nominal (real) Sharpe Ratios of 0.869 (0.539), 0.890 (0.489) and 0.351 (0.215) for UK-wide properties, Greater London and the FTSE100.

Bear in mind, though, that Sharpe Ratios for properties as an asset class are biased upwards, since transaction costs (stamp duty and other dead-weight costs), their relative illiquidity and heterogeneity are not accounted for.


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