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Beware the 2021 house price crash! I’m choosing FTSE 100 stocks over buy-to-let

Harvey Jones
·3-min read
Newspaper and direction sign with investment options
Newspaper and direction sign with investment options

2020 has been a mixed bag for FTSE 100 stocks, but an astonishingly good year for the UK property market. Yesterday, official figures showed house prices rising 5.4% in the year to October. That almost defies logic, given the challenges facing the UK economy right now.

Let’s put that into perspective. Property prices are rising nearly eight times faster than they were a year ago, despite the small matter of a global pandemic. By comparison, FTSE 100 stocks have fallen by almost 15% to today’s 6,588. To me, the stock market is behaving in a more rational way than property right now.

Both the property and stock market face major challenges. Despite the vaccine breakthrough, Covid-19 still isn’t beaten. The latest wave of Christmas lockdowns prove that. As I write, we still don’t know whether the UK will strike a Brexit deal or leave on World Trade Organisation in terms amid much acrimony. 2021 will be bumpy for both property and FTSE 100 stocks, but here’s why I expect the latter to do better.

WATCH: Why are house prices rising during a recession?

I’m buying FTSE 100 stocks for 2021

UK house prices have been artificially pumped up by low interest rates and the stamp duty holiday. Low interest rates look set to continue, but the stamp duty holiday is slated to end on 31 March. Anybody who puts in an offer on a property may now struggle to complete in time to bag the saving.

I have a sneaking suspicion the stamp duty holiday will be extended, otherwise chaos could ensue as buyers fail to complete and chains collapse en masse. It has to end at some time though, and when it does, the current bubble could deflate.

I’m under no illusion about FTSE 100 stocks. Like equities all over the world, they’re propped up by fiscal and monetary stimulus. The big difference is that this stimulus is set to continue, because politicians and central bankers daren’t do otherwise. This means equity investors effectively enjoy a backstop.

I wish it wasn’t like that, but it is. The property market has a backstop too. But that will be scaled back next year, just as hundreds of thousands lose their jobs. Also, FTSE 100 stocks are relatively cheap due to this year’s under performance, while property looks expensive.

I’m shunning buy-to-let

There are other reasons why I favour FTSE 100 stocks over buy-to-let. They’re much cheaper to buy and sell, with trading costs of around £10, with transactions completed in seconds online. As buyers are discovering right now, completing on a property can take months, as mortgage lenders and solicitors drag their feet.

You can also buy FTSE 100 stocks tax-free inside a Stocks and Shares ISA. By contrast, you pay income tax on the rent you generate from a buy-to-let, and capital gains tax when you sell. That CGT bill is likely to rise, with chancellor Rishi Sunak expected to synchronise it with income tax rates in his next Budget.

That’s another great reason why I’m prioritising FTSE 100 stocks over bothersome buy-to-let.

The post Beware the 2021 house price crash! I’m choosing FTSE 100 stocks over buy-to-let appeared first on The Motley Fool UK.

WATCH: Will Interest rates stay low forever?

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Harvey Jones 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.

Motley Fool UK 2020