Buy-to-let no longer offers the returns that made residential property such a successful investment for decades, according to one of Britain’s leading investment management companies.

Rathbones says its appeal “appears greatly reduced” compared with investing in a diversified portfolio of financial assets.

In its latest report, Don’t Bet the House, Rathbones argues that the economics of residential property investment have changed significantly since 2016 as house price growth has slowed, borrowing costs have risen, and the regulatory environment has become less favourable for landlords.

The wealth manager says it sees little prospect of a return to the conditions that drove strong property returns in previous decades and concludes that “the golden age of investing in UK residential property is over”.

Buy-to-let invesment

It notes that the average value of a home in Britain has risen 3.7% a year since 2016, which is broadly in line with inflation.

In London, however, house prices have increased by just 1.3% annually, which is 2.2 percentage points below inflation.

Higher interest rates may even render their business model unviable.”

At the same time, higher interest rates have weakened the buy-to-let business model. Typical two-year fixed rate deals for landlords, using a 25% deposit, have risen to slightly above 5%, having been less than half that amount a few years ago.

Rathbones says: “For the landlords that have relied most heavily on mortgage financing, higher interest rates may even render their business model unviable.”

Better returns

It believes investors would have achieved much better returns from a diversified portfolio of financial assets, with a simple mix of 25% UK equities and 75% international equities rising by 3.4 percentage points a year above inflation since 2016.

The report adds that higher rates of Stamp Duty on additional homes, the reduction and removal of mortgage interest tax relief for landlords, and increasing regulation are exerting more pressure on investors.