Housing market stays resilient, but investing in bricks and mortar is unattractive compared to the alternatives

The housing market’s Teflon-coated status has repeatedly shown few signs of wearing off in the face of restrictive interest rates – by Rob Morgan

 
A July jump in prices seems to reaffirm that. Indeed, the recent move from the Bank of England to cut base rate for the first time in four years, from 5.25% to 5%, has fuelled the market with optimism at the prospects of lower mortgage rates.

There are still some headwinds to overcome, though. Although household budgets have been buoyed by wage rises ahead of inflation, the cost of debt continues to ramp up for a large cohort of homeowners remortgaging. What’s more the prospect of more significant falls in interest rates are reliant on inflation coming more sustainably under control, which is far from a given. With ultra-low interest rates now a distant memory, and a regime of bank rates in the region of 4% in the medium term, a period of stagnation appears the most likely outcome as affordability gradually catches up.

Consequently, investing in physical bricks and mortar for income isn’t as attractive as it once was. Higher interest rates have increased the risk-free rate from safe investments like government bonds and cash, depressing the values of other assets. Tighter regulation and higher taxes have also eaten away at the yield available from rental properties, as well as increased the hassle.

All things considered, it could be possible to achieve a better rate of return by investing in property through indirect investments. It’s also possible to hold these types of investments in tax efficient products, like Self Invested Personal Pensions (SIPPs) and Individual Savings Accounts (ISAs). Any investments held in these types of accounts won’t be subject to income tax or capital gains tax (CGT). You can also get tax relief on the contributions made into a SIPP.

Saving on tax where possible is more important than ever as the new Chancellor, Rachel Reeves, recently admitted tough choices on taxes to reclaim the £22bn “hole” in the nation’s finances. She reiterated she would not raise VAT, national insurance, or income tax, so increases to CGT could be on the table.
 
Rob Morgan is Chief Investment Analyst at Charles Stanley