There’s no denying that buy-to-let investing has generated a tremendous amount of wealth for investors over the past few decades. Indeed, analysis by economists at the Wriglesworth Consultancy for lender Landbay shows buy-to-let investing generated a return for investors of 1,400% between 1996 and the end of 2014.
However, this study was published at the height of the buy-to-let investing boom. Since its publication, the government has introduced a raft of new tax legislation and regulations to try to tame the bubble in buy-to-let investing.
These actions, as well as rising property prices, have hit investors in the pocket and, as a result, the amount of money being invested in this asset class has slumped.
Data published at the end of February show landlords are now buying fewer homes than at any time in the past nine years. The number of buy-to-let purchases declined 15% year-on-year in 2018. In 2011, every one in five houses sold was sold to someone who planned to rent out the property. Now the number has fallen to just one in 10.
It’s easy to see why buy-to-let investors are now selling up and moving on. According to data from online property portal Zoopla, on average, property prices across the UK are up only 22% over the past decade, implying the market has slowed substantially since the financial crisis. Going back over the past 20 years, property values are up an average of 240%.
As property prices have increased, rental yields have fallen. In London, for example, the average gross rental yield from buy-to-let property is now around 3.4%. The national average is just 4.2%.
Assuming property price growth continues as it has done over the past decade, using the national average rental yield of 4.2%, investors can look forward to an average annual total return of 6.4% from buy-to-let property going forward. That’s not bad, but compared to the FTSE 100, it’s terrible!
Over the past decade, the UK’s leading blue-chip index has turned every £10,000 into nearly £30,000, giving an average annual rate of return of just over 11%.
Beating buy-to-let with the Footsie
Some of the index’s constituents have performed substantially better. For example, if you had invested £1,000 in Ashtead 10 years ago, today the value of your investment with dividends reinvested would be worth £66,700.
A £1,000 investment in Melrose with dividends reinvested would be worth £35,500 today. In both cases, the average annual rate of return exceeds 40%. I think I’m quite safe saying that not a single buy-to-let investor has been able to achieve such a lofty rate of return over the past decade.
So there you have it. Over the past few decades, buy-to-let has been a great place to invest your money, but over the past decade, returns have started to decline. Meanwhile, the FTSE 100 has powered ahead and I expect this trend to continue as the global economy continues to expand. Put simply, my money is on the FTSE 100 for the next few decades.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Melrose. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.