Buy-to-let has made many investors extremely wealthy in recent decades. The UK has an undersupply of homes, and is not building new properties quickly enough to cover forecast population growth. As a result, there are likely to be further challenges ahead for first-time buyers, and property prices could rise in the long run.
However, a number of risks now face the buy-to-let segment. Interest rates are due to rise over the next few years, while affordability remains an increasing concern. There are also political and economic risks ahead. As such, buying shares through a SIPP could provide investors with a better chance of making a million in the long run.
Since the financial crisis, government policy has provided a boost to property prices. Policies such as Help to Buy have boosted demand among first-time buyers, and this has filtered through to the rest of the market. Therefore, while property prices versus average wages have increased to record levels, government support has helped them to push even higher.
With Brexit causing a significant amount of political risk, there is no guarantee that the current government policies towards the housing market will continue over the medium term. If they change, and become less supportive, demand may fall. This could mean that house prices face a correction.
Interest rates are currently forecast to rise over the medium term. This could squeeze the profitability and cash flow of landlords, while more onerous lending requirements could make remortgaging more challenging. Since property prices have generally risen in the last decade, yields are at relatively low levels. As such, the impact of higher interest rates on buy-to-let income could be significant. In some cases, it could easily turn it from being positive to negative over the course of a couple of years.
By contrast, a SIPP continues to offer an opportunity to benefit from what appear to be relatively low share prices. The FTSE 100’s dividend yield now stands at around 4.7% after the index recorded a significant decline in value since May 2018. Although further ups-and-downs may be ahead, they are part of the fabric of investing in the stock market. With the FTSE 250, for example, having generated a total return of over 9% per annum in the last two decades, the long-term prospects for shares appear to be impressive given the margin of safety which seems to be on offer.
While the taxation of buy-to-let is becoming increasingly onerous, SIPPs still provide a tax shelter. Contributions are not subject to tax, while an individual can withdraw up to 25% of the value of their portfolio from the age of 55 without paying any income tax. As such, and while buy-to-let has been highly profitable for investors in recent decades, investing in shares through a SIPP now seems to offer a better chance of making a million in the long term.
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