The performance of the UK housing market has been relatively disappointing over the past few years. It has offered more modest returns than many investors were anticipating, with the current annual growth rate being around 2%.
By contrast, the FTSE 100 recorded capital growth of 12% in 2019. When dividends are added to that figure, its total return was in excess of 16%.
Looking ahead, the stock market could produce higher returns than buy-to-let investments in 2020 and beyond. Therefore, it could be a better place to invest to try and build a seven-figure portfolio.
While the FTSE 100 may have risen sharply in the past 12 months, it continues to trade on a relatively low valuation. For example, it yields around 4.3% at the present time. This is significantly higher than its long-term average yield and indicates that it offers a margin of safety. This could equate to favourable returns for investors, with the index containing a large number of high-quality stocks that currently trade on modest ratings.
The property market, meanwhile, has appeared to be overvalued for a number of years. For example, the average house price compared to average income is close to record highs and has only been sustained through low interest rates. While a loose monetary policy may persist over the short run, history shows that a return to higher interest rates is likely over the long run. In such a scenario, many property investors may find that house price growth slows down, or even becomes negative.
Alongside growth, the FTSE 100 also appears to offer a superior income opportunity compared to buy-to-let properties. Due to tax-efficient products such as Stocks and Shares ISAs being available at a low cost to all investors, it is possible to avoid tax on income from FTSE 100 shares. As such, it is possible to generate a net return of 4%+ from buying large-cap shares.
By contrast, buy-to-let yields are less appealing than those of shares on a net basis. Property price rises have generally been faster than rent growth in recent years, which has suppressed yields in many parts of the UK. The end result is that it can be difficult to find a gross yield of more than 4% at the present time. When tax, void periods and repairs are factored in, the net returns available to investors could prove to be relatively disappointing.
As well as the income and growth prospects of the FTSE 100, it offers a degree of diversity that is difficult to obtain through buy-to-let property. Unless you have a vast amount of capital, it can be difficult to build a property portfolio that is large enough to offer reduced risk.
As such, from a risk/reward perspective, the FTSE 100 could be a better place than buy-to-let to invest in 2020. It could improve your chances of making a million.
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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.