Research released this week by Shawbrook Bank showed that 61% of landlords in the UK think that the value of their properties will rise in the next year. That’s despite the 3% hike in stamp duty for buy-to-let properties set to be implemented within the next month, as well as the gradual shift towards mortgage interest payments being tax deductible only for payers of the basic rate of income tax.
Safe as houses?
Furthermore, the prospects for the property market are also rather uncertain due to the expected rise in interest rates in the coming years. In fact, another piece of research released last week by Property Partner highlighted the potential problems that could be caused by a 2.5% rise in interest rates between now and 2020. It estimates that seven out of 10 UK towns would become unprofitable for buy-to-let investors in such a scenario, which shows that while the status quo may lead to property price rises, change could bring a large amount of pain.
While the property market may be headed towards a fall, the stock market could be on the cusp of a high level of total returns. As a result, those 61% of landlords who are optimistic regarding the prospects for rises in the value of their properties over the next year may be better off selling up and piling into the FTSE 100.
A key reason for this is the index’s valuation. It currently has a price-to-earnings (P/E) ratio of around 13, which is historically relatively low. Compare this to a P/E ratio of 5.6 for the UK property market, which is only slightly lower than the all-time high of 5.8 in July 2007, and it’s clear that shares offer significantly better value for money than houses. And with the property market having fallen by 28.7% in the 21 months following its all-time high P/E ratio, the outlook for property is rather bleak.
The wonder of shares
In addition, shares offer a high degree of liquidity and are far cheaper to buy than property. For example, an individual can open a share dealing account within a very short period of time, pay £1.50 per trade and own slices of some of the biggest businesses in the world. Property investors, meanwhile, have solicitor fees, surveyor fees and various other costs in addition to a lengthy buying process that’s poorly regulated, with the asset also being highly illiquid.
While property is about to become less tax-efficient, shares remain a worthwhile purchase from a tax perspective. If bought in an ISA, shares are capital gains tax-free and dividends don’t contribute to an individual’s annual income. As mentioned, property will be subject to a 3% stamp duty surcharge for buy-to-lets from April, while mortgage interest relief will only be available to basic rate taxpayers. And while a limited company can be set up to avoid some of the taxes levied on landlords, this entails higher costs, more admin and more effort for what could prove to be a dire return.
So, while property has been the darling of UK investors for years and it’s of little surprise that 61% of landlords are bullish about its prospects, shares could prove to be a far better buy.