House prices have been one of the big winners of 2020. They’ve increased by around 7% for the year, according to research by lender Nationwide. This has helped buy-to-let investors at a time when rents across the country are under pressure.
But this bump could be short-lived. Some analysts are predicting a slump in property prices next year when the stamp duty holiday comes to an end. With that in mind, I’d avoid buy-to-let property and buy UK shares for 2021 instead.
As noted above, analysts are expecting property prices to fall in 2021. There are two reasons why.
First, the end of the stamp duty holiday will depress demand. Prices have increased this year as buyers have rushed to complete sales before the end of the holiday.
Secondly, buyers have been snapping up properties outside cities. This so-called ‘race for space’ has pushed home prices up rapidly in the most desirable commuter towns.
Both of these tailwinds may dissipate in 2021, which may leave the property market gasping for air. Rising unemployment and high property prices will make it harder for buyers, and that could lead to a drop off in demand when the temporary tailwinds are removed.
As such, I think UK shares could be a better investment for 2021.
Buying UK shares
A portfolio of UK stocks may provide significantly more diversification than buy-to-let property. Indeed, rental property is an exact bet on the state of the UK housing market. Meanwhile, investors can gain access to different sectors and industries by using UK shares.
For example, BAE Systems is one of the world’s largest defence companies. Ethical considerations aside, this business is extremely defensive. Contracts signed with government bodies usually run for many years, which provides a steady income stream for the group.
What’s more, the company also owns a portfolio of intellectual property. This gives it a competitive advantage over other businesses which may be competing for similar agreements.
I’d much rather own a company with the sort of predictable income stream available to BAE over buy-to-let property with the sector’s deteriorating outlook.
Another option is IT infrastructure consultant Computacenter. As the world becomes more and more reliant on technology, I reckon the demand for this company’s services will continue to increase. It already looks as if 2020 is going to be a bumper year for the enterprise. With profits set to expand by a double-digit percentage, shares in the business have jumped nearly 30%. It would be challenging to achieve the same sort of returns with buy-to-let property.
With these sorts of returns on offer, it’s clear to me why UK shares could be a better investment than buy-to-let property in 2021. The ability to diversify across several sectors and industries is also desirable, and I think this could lead to increased total returns in the long run.
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.