Why I wouldn’t bother with buy-to-let after the FTSE 100’s recent stock market crash

Screen of price moves

Whether an individual is investing in shares or property, the aim is the same: to generate high returns with minimal risk. As a result, buying either asset at a high price makes less sense than buying it at a low price.

At the present time, the FTSE 100 appears to offer good value for money. It has fallen by over 1,000 points from its all-time high in May 2018. Even though volatility may be high, its track record shows that a recovery could be on the cards over the long run from this price level.

In contrast, UK house prices appear to lack value for money. Furthermore, they may also lack a clear catalyst to send their valuations higher, which could mean that the FTSE 100 offers greater investment potential at the present time.

Valuation

With the FTSE 100 having lost 1,000 points in seven months, the index now appears to offer a wider margin of safety than it has done for a number of years. It yields almost 4.5%, which is at the upper end of its historic yield chart. Each time it has reached such a high yield, it has gone on to deliver improving performance over the medium term. And since a number of large-cap stocks offer dividend yields of over 6%, it may be possible for investors to obtain an even more appealing valuation through drilling-down into the index.

In contrast, housing affordability remains a challenge for a wide range of people in the UK. First-time buyers who have saved hard, sought to progress in their careers and are even willing to borrow significant multiples of their salary are finding it tough to access the property market. While low supply is one reason for this, affordability could be another reason. After a couple of decades of growth, the house price-to-earnings ratio reached 7.8 earlier this year. That’s the highest since records began in 2002, and indicates that a period of either slow growth or even falls could be ahead.

Catalysts

While Brexit is dominating news headlines in the UK, the FTSE 100’s progress is likely to be more heavily impacted by world events. Most of its incumbents generate their income in international markets. As a result, the index could be more heavily impacted by risks such as a US interest rate rise, as well as increasingly protectionist policies being brought into effect.

However, with the world economy forecast to grow at an annualised rate of 5% between 2019 and 2022, the prospects for the index seem to be relatively bright. Its constituents could enjoy favourable operating conditions that may push its value increasingly higher.

The housing market, meanwhile, could struggle to deliver rental growth. Consumer confidence in the UK is relatively low, while uncertainty regarding the wider economy may encourage an increasingly risk-averse attitude to dominate. Therefore, there seems to be a lack of growth catalysts ahead for buy-to-let investors, with rising interest rates and affordability issues suggesting that buying FTSE 100 stocks could be a better idea.

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Peter Stephens has no position in any of the shares 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.

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