3 Reasons Why It’s ‘Game Over’ For Buy-To-Let

Here’s why investing in residential property is a bad idea

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Looking back through history at bubbles and their subsequent bursting, it always seems so obvious after the event. After all, the signs are always there, but we as investors can sometimes have a difficult job of successfully interpreting them in advance so as to avoid a possible crash.

Take, for example, the UK residential property market. For many people, it feels like a one-way bet. An investment without any risk and which offers superb long term returns. And, while the reality is very, very different, people can hardly be blamed for thinking that buying an investment property is a great idea right now. After all, prices have risen for the last twenty years (credit crunch aside) and have turned a huge number of people into paper millionaires.

Why wouldn’t you want to get involved in such a market?

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

The problem, though, is that the UK property market is all set to disappoint over the medium to long term. Certainly, its past has been incredibly lucrative for many buy-to-let investors but, realistically, the game appears to be well and truly over.

A key reason for this is a tightening of monetary policy or, in other words, rising interest rates. While property investors have enjoyed a boom from historically low rates of just 0.5% for a handful of years, from 2016 onwards interest rates are set to head northwards. Certainly, many buy-to-let investors may argue that even if rates reach 2% or 3% within even a couple of years, mortgages will still be affordable, demand for houses will remain buoyant and house prices will keep going up.

However, the real change with interest rates will not be with regard to their level, but rather in the shift in mind-set that will take place once they start to rise. In other words, potential buyers will begin to factor in a higher rate once their fixed term ends and, as such, are likely to become far more cautious than they are at present. As such, they will question whether their potential purchase offers value for money and may decide to rent until houses become more affordable.

And, while foreign buyers have been attracted by a weak sterling in years gone by, rising interest rates will strengthen the pound and make buying prime London property a lot less appealing, thereby reducing demand even further.

Another key reason why buy-to-let is a bad idea is affordability or, more accurately, a lack of it. For example, since 1983 the Halifax house price index has compared house prices to earnings. In that time there have been two corrections in the housing market: the first in the late 1980s and the second in the late noughties. On those two occasions, the house price to earnings ratio peaked at 4.99 and 5.86 in the UK. Today, the ratio stands at 5.26.

However, this includes regions where house prices have not really recovered since the credit crunch (or have certainly risen at a far slower pace than in the south east of England). As such, the figures are skewed downwards. Focusing solely on Greater London, things look much, much worse for buy-to-let investors. In fact, in the late 80s and late 00s (i.e. just before corrections), the house price to earnings ratio stood at 6.12 and 6.41 respectively. Today, the figure is a whopping 7.84, which is by far and away the highest figure on record.

A further reason why buying a residential property as an investment is a bad idea is changes to taxation. As announced in the Chancellor’s recent budget, landlords will no longer be able to deduct mortgage interest payments from their tax bill. This could mean that landlords end up paying tax even though they have made a loss – especially as interest rates rise and their mortgage rate heads northwards.

For example, at the present time a landlord may receive £1,000 per month in rent, pay £500 in interest costs and have to pay tax on the remaining £500. However, if interest rates treble and his/her interest costs rise to £1,500 then tax will be payable on £1,000 – even though the landlord has made a £500 loss. And, even if interest rates do not rise, profit margins for landlords will in any case be reduced substantially and could push many of them into the red.

Of course, a key feature of bubbles is that they tend to last for longer than expected but, when they burst, lead to a price fall that is a lot faster than anticipated. House prices may continue to perform well in the short run but, in a decade’s time, hindsight may point out that it was so, so obvious at the time.

British CEO gobbles up £238,000 of own stock

What company does he run?

And why is he so confident in its long-term potential?

This new report - ‘One Top Growth Stock from The Motley Fool’ - reveals the full details, both risks and opportunities. Some of which you may find frankly, unbelievable.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent:

  • Double-digit revenue growth
  • Returns on capital almost 600% the UK average
  • Now, profits are exploding again - up 46% in 1 year!

It’s no wonder insiders are buying this stock hand over fist. Last year, they bought a total £492,000 of shares. And now might be the ideal moment to join them.

So please, don’t miss this report, ‘One Top Growth Stock from The Motley Fool’ Including both risks and opportunities.

Secure your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »