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Buy-to-let could plummet in 2021. I’d buy these assets instead

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Today’s newswires present us with a jigsaw puzzle of stories that could lead you to the conclusion that buy-to-let investing has become risky.

Indeed, buy-to-let could be heading for a blow-off top in trading parlance. In other words, the best days for buy-to-let investors could be about to peak and the returns from the activity could plummet in 2021 and beyond.

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Why I’d avoid buy-to-let

One of today’s headlines from Reuters trumpets that UK house price growth has just hit an 18-year high. But, ominously, the report goes on to explain that the Royal Institution of Chartered Surveyors (RICS) thinks the outlook has darkened for the sector.

There’s been a post-lockdown boom in Britain’s housing market and that will have pushed up the selling prices of buy-to-let property. Of course, capital gains are part of the overall return we might expect from a buy-to-let investment over time.

But RICS expects significant job losses over the coming months to hurt demand for property despite the availability of cheap mortgage finance. However, prime minister Boris Johnson said this week he wants to make it easier for first-time homebuyers to take out a mortgage.

And, in fairness, although RICS thinks the outlook has darkened for the sector, it still believes the increased sales will continue for the rest of 2020. Although RICS’s gauge of sales expectations for the next 12 months declined in September close to March’s record low.

Indeed, expectations are for choppy demand. But it’s fair to say there are voices in the industry that don’t expect the latest data to cause a fall in house prices. Meanwhile, other headlines tell us the UK jobless rate reached 4.5%, which is higher than expectations in the three months to August.

Balancing that news, another headline explains the Bank of England is asking banks how ready they are for sub-zero interest rates. Indeed, higher interest rates will not be arriving anytime soon. And low interest rates help to prop up house prices.

Assets I’d invest in right now

It’s a mixed and confusing picture. But with property prices so stretched when it comes to affordability, I’m inclined to be wary of the downside potential in the buy-to-let sector. Instead, I’d invest in shares and share-backed assets such as funds, trackers and investment trusts.

When you consider the similarities between long-term investments in property and shares, it’s clear that share ownership is a viable alternative to property ownership. Both assets have the potential to deliver capital appreciation, and they both pay investors income. With property, it’s the yield from rents, and with shares, it’s the yield from dividends.

However, shares come out on top for me. That’s because every share is backed by a business with the potential to create value. And that’s unlike the passive rising and falling prices of property.

Right now, I’d look at investment opportunities such as Lindsell Train Investment Trust and Blackrock Throgmorton Trust. I’d also consider tracker funds such as HSBC FTSE 250 Index, Vanguard FTSE 100 Index and UBS S&P 500. On top of that, a few carefully selected shares backed by high-quality underlying businesses would sit well in a long-term portfolio.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lindsell Train Inv Trust. 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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