Buy to Let vs Stocks and Shares

In the UK we're hardwired to believe that property is a safe and profitable investment, providing both secure income as well as capital growth.

In the UK we are hard-wired to believe that property is a safe and profitable investment, providing both secure income as well as capital growth.

This natural bias has been reflected in recent decades by the explosion in the buy-to-let market, an option that a nation of instinctive “home buyers” has naturally adopted for long-term investment. Other changes have fuelled this growth including the launch of specific buy-to-let mortgage products, other loans and advice; people looking for alternative investments as workplace pensions declined; and legal changes which made being a landlord more attractive.​ The total impact of all of this? According to the Council of Mortgage Lenders, lenders advanced more than 1.7 million buy-to-let loans between 1999 and 2015!

This preference for property investment has been further reinforced by events that made “bricks and mortar” seem instinctively safer: after the 2008 financial crash. Followed by our recent political uncertainty, on-going volatility in the financial markets and the fact that we are just culturally more cautious of investing in Stocks and Shares - they just seem too risky! Baby Boomers who bought property in the 1960s before the wild inflation of the 70s have seen their property investment grow from a few thousand pounds to hundreds of thousands. Their positive experience helped influence the next generation. Those buying in the 1980’s also enjoyed significant growth in the value of their homes, but they would also have seen long periods when interest rates rose to crippling levels and house values fell into negative equity – sometimes 25% less than the purchase price. Despite all of this, supporters of property investment still point to the risks of investing in stocks and shares: the dot com bubble bursting in 2000, the financial crisis of 2007/8 and the instinctively perceived superiority of owning bricks and mortar over “intangible” Shares. What are the facts? Adjusted for Inflation, Property prices have increased on average by 2.6% per annum over a period from 1979. There have been two major surges in house prices in that time. One in the late 80’s and the other leading up to the financial crisis but there have also been significant downturns in between. The result is an increase over the period of 1,000% in nominal terms. All of which seems quite impressive. However, what most people seem to have overlooked is that the Stock Market, for all of its real and perceived volatility, has delivered 1,700% in nominal terms over the same period! So much for Capital Growth – when we look at income, the annual returns generated by Rentals range from 2.7% to 6.7% across the country and change frequently. Whereas the Dividends from Shares have averaged 4% over the same period with the current yield around 3.4%. There are also other factors to consider such as preparing and maintaining a property for rental can be onerous, legal disputes and any periods without a tenant bring financial risk. George Osborne as Chancellor also reduced the attractiveness of Buy to Let for small landlords by taxing second property purchases and reducing the tax relief on mortgage payments for higher rate taxpayers. And we should not forget that a surging economy could make lead to increasing interest rates which will threaten the slender margins available for buy-to-let rentals.

So in conclusion In simple terms, it’s all about balance! Buy to Let property certainly has a place in a large diversified portfolio where the value of the property is proportionate to the other holdings. As a higher risk investment, the usual caveats about being able to weather any reasonably foreseeable periods of downturn would apply to an illiquid asset. A direct comparison of these two assets as pure investments is an easy one to make; however, you will not find many banks willing to lend you money to buy into the Stock Market.