Stocks have been booming in recent years, while buy-to-let landlords have faced rising costs and seen house prices flatten out.
This has been the picture for several years. So is it time to start thinking about buy-to-let property as a contrarian investment?
I can see three reasons why you might make this argument.
1. Buy-to-let mortgage rates are very low, with rates under 2% available. According to research carried out by personal finance website Moneyfacts, the cost of buy-to-let borrowing has fallen so that rates are now much closer to cheaper residential mortgages.
2. The percentage of UK homes bought by landlords has fallen from 18.7% in 2011 to 11.4% in 2018, according to research by estate agent Hamptons International. Rising costs and fears of a housing crash appear to be keeping landlords out of the market.
3. A no-deal Brexit has been seen as a potential trigger for a housing crash. But a deal now seems quite likely and fears seem to be receding. Some estate agents are now starting to suggest that UK regions could see house prices rise after Brexit.
Here’s what I think
Let’s deal with the points I’ve raised above one at a time.
Cheap mortgages: In my view, mortgages are incredibly cheap at the moment.
But I think that the main reason for this is that lenders have cash to deploy and are keen to gain market share. This feels like the tail end of the boom to me, when lenders relax their terms to attract more borrowers.
I don’t think there’s any reason to think that now is a good time to borrow more. After all, interest rates can only rise from current levels. And if they do, I suspect house prices will fall.
Buy-to-let numbers down: Many smaller landlords have sold their buy-to-let properties as a result of changes to tax and regulations.
These include a 3% stamp duty surcharge on rental properties and the phasing out of mortgage tax relief. Credit checks have also been tightened for landlords with multiple properties.
It’s harder to turn a profit than it used to be. These changes suggest to me that landlords should be cutting their debt levels, not borrowing more.
Brexit: Let’s be honest. We don’t know when Brexit will be nor what might happen to the economy next year. Betting on house price growth after Brexit seems risky to me, although it’s not impossible.
Why I’m buying stocks?
I’ve continued to buy stocks over the last year and have no plans to stop. Brexit has seen a lot of money flow out of UK stocks, and I think the market offers decent value.
For index investors, I think the FTSE 100 looks reasonable, with a dividend yield of 4.5% and a price/earnings ratio of 16. I’d also be happy to put cash into the mid-cap FTSE 250.
If you believe the housing market will improve after Brexit, then I think high-yielding housebuilders such as Barratt Developments could make sense. Elsewhere, I’ve been buying oil stocks, financial firms and packaging companies. I’m also starting to get interested in battered travel stocks such as TUI and Carnival.
I plan to remain 100% invested in the stock market.
The only time I might get interested in buy-to-let would be during a proper housing crash, when clear bargains were on offer. I don’t see that happening at the moment.
