Forget buy-to-let: I think FTSE 100 shares can help you to make a million

The FTSE 100 (INDEXFTSE:UKX) could deliver superior returns compared to a buy-to-let in my opinion.

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The past performance of the UK property market shows that it moves in cycles. House price growth has always been followed by a period of decline, with growth then superseding it once a more favourable economic outlook returns.

At the present time, the property market is experiencing a period of decline in some parts of the UK. Notably, London house prices are falling at their fastest rate in a decade. It would be unsurprising for prices across the country to come under pressure as the political and economic prospects for the UK remain uncertain.

As such, now could be the right time to buy a range of FTSE 100 shares. In many cases, they appear to offer wide margins of safety, as well as the potential to deliver high returns.

Cyclicality

With house prices having risen significantly since the financial crisis, it is perhaps unsurprising for them to now experience a period of mixed performance. Potential buyers may be put off by the uncertainty that faces the UK economy at the present time – especially since wage growth has lagged house price growth in recent years.

Of course, government policies such as the Help to Buy scheme and stamp duty land tax (SDLT) relief have made it easier for first-time buyers to get onto the property ladder. But with the political outlook for the UK being uncertain, the end of such policies could cause a severe reduction in demand across the sector. This may lead to falling prices and capital losses for buy-to-let investors.

FTSE 100

While the FTSE 100’s historic performance highlights its cyclicality, the index appears to have stronger growth catalysts than the UK property market.

Certainly, it has made strong gains since the financial crisis, but the future prospects of major economies such as China and the US means that the index’s members could benefit from favourable operating conditions. This could lead to growing bottom lines across a variety of FTSE 100 sectors, which may produce higher valuations as investor sentiment improves.

Furthermore, the index contains a number of stocks that trade on historically low valuations. It is possible to build a portfolio of stocks with price-to-earnings (P/E) ratios of under 10, for example. Although a cheap stock is not necessarily a good value stock if its prospects are challenging, the low valuations across sectors such as banking, utilities and some consumer goods companies provide evidence that the wider index may be undervalued, despite trading close to an all-time high.

Outlook

Investing in FTSE 100 shares could be a better means of making a million than undertaking a buy-to-let. The index seems to have a more attractive outlook, and investors could capitalise on its cyclicality through buying undervalued shares for the long term that could pay off in a big way.

By contrast, house prices may continue to fall. This could mean that now is not the right time to invest in property, with its risk/reward ratio appearing to be unfavourable.

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.

Peter Stephens 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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