Equities return high yield over 20 years

EQUITIES have hammered houses as an investment class over the last 20 years a study by Davy Stockbrokers has found.

The study found that while housing has performed well against shares since 1998, shares have fared significantly better over 20 years.

The study: 'Twenty years of growing: property investment versus equities' by Davy Stockbrokers' head of research Robbie Kelleher concludes that even if people get their timing wrong in equities investment they can still make a good return.

Mr Kelleher, who buys and sells equities, acknowledges that proponents of the property argument will point to historic performance and suggest that the evidence is very much weighted towards property.

"For example, the average price of a house in Ireland in 1998 was about €135,000; this year it will come close to €300,000, an increase of more than 120%.

"Over the same period, equities have delivered little or no gains. The peak for the ISEQ in 1998 was just over 5,400. On the screens as we write, it is currently trading at 5,670," he says.

Mr Kelleher argues that delving a bit further back in history, the argument is far less clear cut.

"We thought 20 years might be a good time frame. In 1984 the average price of a house in Ireland was €45,000. Hence, over the 20 years since, the value of an investment has increased more than six-and-a-half fold. Over the same period, consumer prices have risen by 80%, so the gains in real terms have been very impressive."

The Davy man said that the returns on equities have been far more significant and cites Davy's parent Bank of Ireland as an example.

"At the end of 1984, Bank of Ireland stock was trading at the equivalent of 48c. Today it trades at 1100c, an increase of more than 20 fold. If one had invested the €45,000 in Bank of Ireland shares rather than a typical house, the capital value of one's investment would now exceed €1m, three times more than the current value of the house," he said.

Mr Kelleher stresses that this calculation takes no account of the dividend stream that would have accrued in between times.

"Our banking team currently predicts that a dividend of 45.5c will be paid by Bank of Ireland in the current financial year. That would now represents an income yield of almost 100% on the original 1984 investment.

"If one choose to reinvest the dividends in Bank of Ireland shares, the current value of the original €45,000 investment would now be €2.6m. Unfortunately, we do not have the necessary data to compute the comparable figure for an investment in housing," he said.

Mr Kelleher said that in absolute terms, equity markets are well off their highs and, in many cases, are not much changed from levels prevailing in early 1998.

"In contrast, Irish house prices are trading at an all-time high and at levels that compare with some of the most expensive locations in the world. Most importantly, the investment ratios look very demanding. The price/earnings ratio on a typical Irish residential property exceeds 30x at a time when earnings (ie rents) are in decline," he said.

Mr Kelleher said that although equities have very significantly underperformed property since 1997, the ISEQ has still outperformed residential property by more than 80% over the last 20 years.

"One final point on the issue. If one gets the timing of equity investment very wrong, the returns over time can still be considerable. For example, the peaks immediately prior to the equity market crash of October 1987 for the three shares in question were AIB 150c, Bank of Ireland 92c and CRH 90c.

"The subsequent declines pale into insignificance in the context of the gains that were realised over time," he concluded in a note to clients.