Beware buy-to-let! This one figure tells me house prices must crash

Harvey Jones warns that the property market is being underpinned by Government stimulus that soon comes to an end.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buy-to-let was a fantastic investment for 20 years, before former Chancellor George Osborne unleashed his tax crackdown in April 2016.

Falling down

Since then it has lost its charm and, as I wrote here, it’s harder than ever to make money out of being an amateur landlord. As well as the effort involved and the huge sums of tax you have to hand over to the Treasury, there’s another danger. The housing market’s on increasingly rocky ground.

Today’s Nationwide house price index show a small seasonally adjusted monthly drop of 0.2% in May. Year-on-year price growth slowed to 0.6%, down from 0.9% in April. The average price rose just £26 last month to £214,946.

Help to Crash

That isn’t the figure that worries me, though. In fact, given current economic uncertainty and the Brexit shambles, I think house prices have been impressively resilient. The problem is the market has a false underpinning.

New research published this week shows more than half of all newbuild house sales are now funded by the Government-backed Help to Buy scheme. Last year saw 100,399 newbuild purchases, of which 52,057 were funded by the scheme, according to analysis of official figures by modular homes developer Project Etopia.

In Northampton, an astonishing 97% of sales were funded by Help to Buy, with Burnley, Derby, Warrington, Bedford, Watford, Harlow and Wolverhampton close behind.

False prospectus

Under the Help to Buy Equity Loan scheme, buyers only need a cash deposit of 5% to purchase a property. The Government lends 20% (up to 40% for London) and this allows the buyer to take out a competitive mortgage for the remaining 75%. So the housing market is being propped up by false stimulus from the taxpayer.

The big housebuilders have been a massive beneficiary. For example, Persimmon’s profit per house has tripled from around £20,000 to £60,000 since Help to Buy was launched in 2013. In February, it became the first in its sector to post profits of more than £1bn. Investors have benefited too, as Persimmon currently yields 11.5%.

Trouble ahead

My worry is that Help to Buy will be scaled back from April 2021, so that only first-time buyers can benefit. Two years after that, it will be scrapped altogether. Project Utopia CEO Joseph Daniels warned: “Once the scheme ends, the rug could be pulled out from beneath those areas that have come to rely on Help To Buy.”

This may not be a complete meltdown. There are some competitive 95% mortgage deals on the open market. Also, Help to Buy only applies to new builds, so the resale market is standing on its own two feet (with a little assistance from all-time low mortgage rates).

We have a winner

Investors also enjoy Government largesse in the shape of the Stocks and Shares ISA, which allows people to invest £20,000 a year and pay no tax on their income and growth. There’s a key difference between the two, though. The clock is running down on Help to Buy. Nobody expects ISAs to be scrapped.

Here’s another reason to favour shares over property right now. The results are in: FTSE 100 stocks have smashed buy-to-let.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »