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

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.

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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.

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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.

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