The outlook for the buy-to-let market has changed significantly over recent years. House prices are now trading close to record highs when compared to average incomes, which suggests that further capital growth may be limited.
Furthermore, tax changes mean that the net returns available to landlords could be reduced further. Meanwhile, the changing outlook for the world economy could make the illiquidity of property investment highly unappealing.
As such, now may be the right time to consider opening a Stocks and Shares ISA to invest in a diverse range of equities for the long term.
House prices
Affordability is becoming an increasingly relevant part of the buy-to-let industry. With house prices having risen significantly over the last decade, it has become increasingly difficult for first-time buyers to get on the property ladder. Even with government policies such as Help to Buy and low interest rates making the process easier, the difference between average wages and house prices means that they are becoming increasingly unaffordable.
This may lead to a slower rate of growth for house prices over the coming years. Their history shows that they have not risen unabated in perpetuity, and that periods of decline have taken place. Therefore, it would be unsurprising for house prices to experience slower growth following their rapid gains since the financial crisis.
Tax changes
The net returns available to landlords could come under further pressure over the medium term. Changes to the treatment of mortgage interest payments, in terms of being offset against rental income, mean that many property investors will pay more tax over the coming years.
Alongside this, new landlords will be subject to a 3% stamp duty surcharge on second properties. This could make property investing more costly and less profitable, with the political consensus apparently in favour of helping first-time buyers, rather than investors.
Liquidity
With the world economy experiencing rapid change that seems to take place at a faster pace than ever, holding liquid assets such as shares could be a major advantage. It may allow an investor to pivot from one asset to another, thereby capitalising on changing market conditions.
The illiquidity of property means that it takes a number of weeks, or even months, to switch to potentially more appealing assets. It is also costly to sell a property, which may force many landlords to hold on to their assets for the long term.
Stocks and Shares ISA
Therefore, with shares offering liquidity, as well as value opportunities and tax-efficiency when purchased through a Stocks and Shares ISA, now could be the right time to buy a diverse range of equities.
The FTSE 100 and FTSE 250 appear to offer good value for money at the present time. Their above-average dividend yields and long-term growth potential suggest that there could be better opportunities to generate gains when compared to buy-to-let investments.