At first glance, it might appear that buy to let is a much better investment than the FTSE 100. Indeed, with buy-to-let property, it is easy to borrow money to improve your returns with leverage, something that is not advisable with share investing.
And, owning rental property has generated better returns for investors over the past 20 or 30 years than the stock market.
However, times are changing. Buy-to-let investing is no longer as attractive as it once was. Efforts by the government to remove the advantageous tax breaks that buy-to-let investors used to receive, coupled with stagnating home prices and restrictions on mortgage lending mean this market is unlikely to offer the same kind of returns over the next 10 years as it did over the past decade.
And it is for these reasons, among others, that I believe the FTSE 100 should thrash buy to let as an investment over the next 20 years or so.
One of the reasons why investors have seen such impressive returns from the buy-to-let market is that UK house prices have taken off.
During the past decade, UK home prices are up 23% on average. In London, the boom in home prices has been even more explosive. Since 1995, the average property price is up between 450% and 650%.
The price of a detached property, for example, has surged from £258,000 in 1995 to £1.4m today. I think it’s highly unlikely this will be repeated over the next 20 years.
Another 450% increase in detached properties by 2039 would put the average price at £7.7m. If most families are struggling to buy a home at £1.4m today, £7.7m will be impossible.
Put simply, I think property price growth will stagnate over the next few years, and as a result, the Footsie 100 should outperform buy-to-let property.
The great thing about the FTSE 100 is that more than 70% of the index’s profits come from outside the UK.
So, as long as the global economy continues to expand, the index’s constituents should be able to continue to grow their bottom lines. Higher earnings justify a higher share price, which in turn justifies a higher FTSE 100.
On top of this, FTSE 100 constituents are known around the world for their dividend payments. At the time of writing the index supports a dividend yield of around 4.5%, roughly the same as you would get from a rental property based on the UK’s average rental yield.
The bottom line
So overall, while it looks as if the UK property market is running out of steam, the global economic expansion should continue to drive the earnings of FTSE 100 companies higher.
On that basis, I reckon the FTSE 100 should be able to thrash buy-to-let property going forward. As a bonus, you don’t have to do anything to profit from this growth. Unlike buy-to-let property, which requires babysitting, with the FTSE 100 all you need to do is buy a passive index tracker fund, sit back, and relax.
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Rupert Hargreaves owns no share 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.