With house prices having risen significantly since the financial crisis, there may be less scope to generate capital growth from buy-to-let investments.
However, that’s just one reason why now may be the right time to focus on the stock market. Other factors include changing tax rules and the appeal of a wide range of FTSE 350 shares.
As such, for investors who wish to retire early, now may be an opportune moment to ditch buy-to-let property and instead focus on mid and large-cap shares.
House prices have been high for many years, but could now experience a period of slower growth. Chief among the reasons for this is a lack of affordability. The ratio of house prices to incomes in the UK is close to a record high, and history shows this level is unlikely to be sustained in the long run.
One factor which could prompt a period of slower growth for house prices is rising interest rates. Although they’re not expected to increase rapidly, and could even fall in the short run, even a modest increase over the coming years could cause house price affordability to decline. Should government policies such as Help to Buy also negatively impact on affordability when they’re eventually removed, the prospects for landlords could be relatively downbeat.
Buying a property has always been expensive. Costs such as solicitor fees and stamp duty have meant property investors have required a large amount of capital to add new assets to their portfolios.
However, the 3% additional stamp duty charged on the purchase of second homes makes the cost of buying a property even more expensive. It will cause the returns for landlords to be lower than they otherwise would be, while changes to the offsetting of mortgage interest against rental income could do likewise.
By contrast, investing in shares is highly tax-efficient. Investing through a Stocks and Shares ISA, for example, avoids dividend and capital gains tax, while withdrawals can be made at any time. As such, the tax bill for a FTSE 350 investor is likely to be considerably lower than for a buy-to-let investor. This could mean the former’s net returns beat those of the latter in the coming years.
As well as buy-to-let being less appealing than it has been in the past, the stock market also appears to be more attractive than in recent years. The FTSE 350, for example, contains a number of stocks that trade on low valuations compared to their historic averages. And with them exposed to fast-growing economies, such as those across the emerging world in many cases, they may be able to deliver surprisingly strong growth performances in the long run.
As such, now could be the right time to avoid buy-to-let properties and buy FTSE 350 shares. It could help to bring your retirement date a step closer.
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