Why some buy to let investors are losing faith in property

Some buy to let landlords are having second thoughts about the reliability of property as a long term investment, according to research.  Is this logical or is their logic flawed?

House prices went through the roof a few years ago, but since then home values have cooled and mortgages are hard to come by.

As a result a third of investors (34%) in December considered buy to let as the best place for their money – down from nearly half (49%) for the three months ending September 2010.

The survey has hit rock bottom in the three years since September 2008, when the Association of British Insurers (ABI)  first collected figures.

Despite this drop in confidence, property is still the UK’s favoured investment – although more people are switching to savings and investment products to keep their cash more liquid.

Property investment is popular despite equities returning better results for almost every 20-year investment period between 1960 and 2009. Equities have out-performed ungeared property in two-out-of-three (64%) of five-year periods over the last 50 years.

Cash savings eroded by rising inflation

Other investments may not turn out as safe havens from falling property prices as Bank of England governor Mervyn King has warned savers will suffer as rising inflation outstrips interest rates and tax to eat in to their nest eggs.

People opting for savings accounts increased from 11% to 18% during the period, while the popularity of  ISAs, stocks and shares rose from 9% to 14%.

Helen White, the ABI’s acting director of life and savings, said: “For the vast majority of savers, a pension should be a fundamental part of their savings plan. Pensions attract generous tax relief and, through life styling, can reduce risk as people approach retirement.

“We know that over 40% of people are not taking basic steps to save sufficiently for their retirement. This may be as property, despite this fall from favour, is still seen by many as being their retirement nest egg.”

The comparisons made above between property and equities do not take gearing into account.  Property is the most popular form of investment to borrow against to achieve better returns over a longer period.  Pound for Pound it’s true that equities have out-performed property.  However, borrowing 50% of a value of a property doubles any returns on cash invested.  Borrowing at 80% increases any gains five fold.  The art is balancing borrowing exposure with sustainable cashflow.  Property118.com are soon to release a suite of calculators to allow people to crunch their own numbers in this regard.

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