House price growth has become something of a constant in the UK. Indeed, many investors assume that, over time, house price growth is a given due to a lack of supply versus demand. While that may provide a tailwind to the industry over the long term, the housing market appears to be susceptible to a period of low returns over the next decade.
Various risks could be ahead. They include rising interest rates, a lack of affordability and changes to government policy. At the same time, the stock market could produce high returns that mean the opportunity cost from undertaking a buy-to-let is high.
Challenging future
While interest rates have spent the last decade at record lows, that situation is unlikely to last in perpetuity. Ultimately, the UK economy has been on ‘life support’ for an extended period. While this has enabled it to deliver growth in recent years, interest rates are likely to rise over the next few years in order to counter the possible threat from a higher rate of inflation.
Even a modest increase in interest rates could cause problems for the UK housing market. House prices versus average earnings are at the upper end of their historic range. Should interest rates on mortgages rise, many first-time buyers may simply be unable to afford to purchase a home. This could mean that prices are forced to fall, or at least stop rising at their historic pace. Otherwise, transaction volumes could fall even further.
Alongside this threat, political risk is high. The housing market has been supported by government policies such as Help to Buy. Should they be phased out, it could put further pressure on the industry over the medium term. If first-time buyers require larger deposits, demand for new homes could dry up and shift the supply/demand balance of the industry to a less favourable level for existing buy-to-let investors.
Opportunity cost
While a rising interest rate and political uncertainty may impact negatively on the stock market, its international appeal could help it to deliver impressive returns over the coming years. The FTSE 100 is an internally-biased index, while the FTSE 250 also has a significant amount of international exposure. This could provide investors with the opportunity to diversify.
There could also be an opportunity to purchase UK-focused companies. Unlike house prices, UK shares are not trading anywhere near their historic highs in many cases. This could provide them with significant growth potential that allows them to offer high total returns in the long run.
Therefore, while buy-to-let investing has proven to be a lucrative investment opportunity in the past, over the next decade it may present a significant opportunity cost. With various risks, and the stock market seeming to have a bright future, now could be the time to buy a portfolio of shares, rather than a buy-to-let investment.
