With house price falls continuing in recent months in various parts of the UK, buy-to-let investors may be feeling somewhat concerned. After all, house prices are almost at a record high when compared to average earnings, and the UK faces a period of significant political and economic change over the coming months.
As such, now may be the right time to invest in FTSE 100 stocks. Not only do they appear to offer wider margins of safety than the property market, they could also deliver a higher growth rate with lower risks due to their international exposure.
Valuations
In England, average house prices are around eight times average incomes. This is an exceptionally high level, which is above the 7.1 recorded prior to the financial crisis. It is, of course, somewhat unsurprising. House prices have enjoyed a period of low interest rates and strong economic growth since the financial crisis. There has also been a lack of supply versus demand, while government policies such as Help to Buy have further catalysed the market.
Now, though, there seems to be less scope for house price growth over the medium term. While this may not necessarily mean that a house price crash is ahead, it could equate to a period of modest declines or slow growth that limits the profit potential for investors in the sector.
The FTSE 100, meanwhile, has not enjoyed the same scale of growth over the last couple of decades. Certainly, it is still enjoying a bull market that has lasted for over a decade. But its dividend yield of 4.5% suggests that it offers a margin of safety relative to its historic levels. This could mean that investors in property have the opportunity to pivot from an overvalued asset (property) to undervalued assets (FTSE 100 shares).
Growth potential
With the UK’s political and economic outlook being highly fluid at the present time, the growth prospects for the buy-to-let sector may be limited. Investors and consumers may be somewhat cautious when it comes to buying property, which could lead to reduced demand in the short term at least.
The FTSE 100’s international exposure, from which its members generate two-thirds of their sales, could provide it with a tailwind over the long run. Major economies such as the US, China and India are growing at much faster rates than the UK, and this may mean that they are able to offer favourable trading conditions for FTSE 100 constituents.
Alongside this, the ease of diversifying in the FTSE 100 could mean that it offers less risk than the buy-to-let sector. Therefore, with it offering better value for money, stronger growth prospects and less risk, the FTSE 100 could be a better way to make a million when compared to investing in buy-to-let properties.
