The Motley Fool

Thinking of a buy-to-let? I think you could be making a major mistake

Even though the UK economy is forecast to grow by just 1.2% in 2019, house price growth has remained resilient. Over the last 12 months, house prices have increased in value by around 2.8%. That’s higher than inflation, and suggests the industry continues to benefit from favourable government policies and a lack of supply.

However, the prospects for the industry could change as policy tools used after the financial crisis begin to fade. Alongside this, opportunities elsewhere may mean that buying shares, rather than homes, becomes a more appealing prospect.

Changing times

The UK housing market has undoubtedly benefitted from the policy action put in place following the financial crisis. This includes low interest rates, quantitative easing, and government policies such as Help to Buy. They have made it easier for first-time buyers to get onto the property ladder, while making it cheaper for homeowners seeking to remortgage.

The impact of policy action over the last decade has been to push house prices to their highest-ever level compared to average earnings. This suggests the current level of growth is unsustainable. And with interest rates forecast to rise, quantitative easing at an end, and the prospect of an end to the Help to Buy scheme over the next few years, the apparently constant rise in house prices could begin to fade.

Improving outlook

While the end of quantitative easing and higher interest rates may also be bad news for the stock market, it appears to still offer a wide margin of safety, despite its decade-long bull market. For example, the FTSE 100 has a dividend yield of over 4% at the present time. This suggests a number of its constituents could be undervalued.

With the world economy continuing to offer high growth potential, it may be prudent for investors to consider diversifying into a range of non-European economies, while also having exposure to UK-focused shares that have seen their valuations negatively impacted by Brexit. This could allow them to reduce their overall risk versus buy-to-let, which is often focused on a specific region or even precise location, such is the difficulty of diversifying within the sector.

Cycles

With all asset prices moving in cycles, the period of seemingly insatiable house price growth that has been a feature of the UK economy over recent years may now be coming to an end. It seems as though monetary and fiscal policy is against house price growth, which could force it to return to more sustainable levels.

In contrast, the UK stock market appears to be ripe for investment. The FTSE 100 trades less than 10% higher than it did 20 years ago. As such, it could prove to be a strong performer over the long run, which means it may be worth buying a range of stocks right now.

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