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FTSE 100 or buy-to-let: which could be safer in an economic crisis?

The economy is stuttering and fears are rising that it might turn into a full-blown downturn. I can understand those fears. Unresolved levels of debt from the 2008 financial crisis are my main cause for concern and that doesn’t just mean UK consumer debt.

The situation in Italy looks unlikely to resolve itself and I think the country is likely to remain a problem until, perhaps, the euro is eventually abandoned. It is simply not feasible for countries like Greece and Italy with very traditional economies to keep up with the German economic powerhouse so the euro project is slowly becoming like those dishes from the other night you can’t face washing. You want to ignore them, but it’s getting harder to avoid the smell from the kitchen.

Rising US interest rates are making bonds more appealing resulting in money being moved out of stocks. This is being hastened by a US-China trade war which is sending shockwaves through to the UK because global markets are so interconnected. Brexit is also looming and could cause some panic in the short term, but over the longer term, I think any problems will be ironed out.

Safe as houses?

Which brings is to the point of this article. There are worries about the value of property in the event of a no-deal Brexit. Mark Carney, the Governor of the Bank of England, even suggested there could be a repeat of the last financial crisis with house prices falling by a third over the next three years. I’m not going to say this won’t happen, but unlike in 2008, at least politicians are in a position to prevent this. But whether they do or don’t, aside from having to put our faith in politicians, it is not a good time to be looking at entering the buy-to-let market anyway with stamp duty for a second home currently at 3%. This is on top of 5% stamp duty for homes in the £250,000 to £925,000 bracket. When you add agent fees, legal fees and other expenses, you need to be sure rental income will provide you with a good return after mortgage payments and maintenance. The bottom line is, the government is putting the squeeze on buy-to-let landlords.

Buy low, sell high

Shares have one big, instant advantage over buy-to-let as they are more liquid. It is much quicker and cheaper to sell a FTSE 100 share than a house if you need to access the money. And the drawbacks? They are more volatile as shown by the past month with the FTSE 100 losing around 10% of its value. While it’s certainly unpleasant to watch your holdings do this, it also presents good buying opportunities. There are no guarantees that the market won’t drop further, but it is important to remember that the FTSE 100 is falling based on fear rather than a recession. And in the words of Warren Buffett “be fearful when others are greedy and greedy when others are fearful”.

Both the FTSE 100 and buy-to-let could suffer in the event of worsening economic conditions, but I think the risks of investing in stocks are much easier to mitigate. When you also consider how much margins on buy-to-let are being squeezed by the government, I know where I’d rather have my money.

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