Ask anyone the question “are you better off buying or renting”, and the answer will practically always be buying.
Ask the same question, but prefixed with “if you need a 90% mortgage…” or “if your pay is 90% commission…”, would the answer be the same? It probably would, but should it be?
In the UK, home ownership has always been seen as the only way to go. Based on a healthy (balanced) supply and demand situation, the market would enjoy a steady release of new properties, right across the various price levels, and annual price growth would be somewhere around inflation.
However, when supply is year on year around 50% of demand, it follows that price inflation is driven by market forces. Aside from the locally grown demand, London is a world capital, with an international workforce, so demand is swelled by investors from home and abroad looking for a safe haven for their pension.
The result is that the average age of first time buyers is approaching 40, mortgages with government guarantees are back at 95% and there are now four million PRS households in the UK compared with two million in 1980.
Renting is already established as a viable alternative to owning in Europe, Scandinavia and North America. In the US, rented housing is around 35% of the market, up from 30% in the last 10 years. This is probably helped by the fact that in the US there is a rental planning use class that requires units remain in the rental market for an agreed period. Apparently what happens in the States always gets here eventually, but while we’re waiting, let’s get back to that question: are you better off buying or renting?
For the majority of purchasers, affordability is a fundamental driver, and this is particularly an issue while interest rates are so low. Interest rates will undoubtedly go up, but mortgage approvals use today’s salary level to ensure there are adequate funds to cover interest and repayment liabilities. A jump in interest rates in the next few years could render many mortgages unaffordable, with the ensuing nightmare of recovery and even repossession. Perhaps mortgages should only be approved where a 5% rise in interest rates can be covered by a buyer’s current salary. If not, there is always PRS as a fall back.
Purchase costs can be substantial, and should be dialled into any comparative exercise between renting and buying. As an example, an 850 sq ft flat being purchased for, say, £850 per sq ft, is going to be liable for stamp duty land tax (SDLT) of £22,000, while legal fees and survey/valuation add another £2,000, lifting the purchase price by 5%. By comparison, executing an assured shorthold lease requires GCSE English and a deposit equivalent to six weeks’ rent.
Annual running costs for the purchase option would include service charges (£5,000), ground rent (£500) and a cleaning/maintenance/contingency fund of say £1,000. Assuming a 20% deposit (£110,000), a mortgage at 4% would cost £17,500 a year. Arranging the mortgage could have cost around 1% (£4,500), so all in first year costs (on top of the deposit) total £28,000.
Renting the same flat would cost an administration fee of £250, plus the six weeks’ rent deposit of £2,775. Service charge, ground rent, insurance and no fault repairs are included in the rent. An allowance of £250 for breakages brings the annual cost based on monthly rent of £1,850 to £22,700.
So there is a difference of £5,000 between renting and purchasing in the first year. Furthermore the rental option means that you’ve still got the deposit, purchase fees and SDLT in your bank account (£134,500), you are not saddled with debt, you are in control of your outgoings and you can move when you feel like it — for £250. Capital appreciation has not been factored in for two reasons: first, property values can and do go down as well as up; and second, if the tenant is renting for affordability reasons the comparison is irrelevant.
There are an ever growing number of professional landlords stepping up to the mark in the UK, offering a professionally managed service in well-located new buildings, usually with on-site management and sophisticated tenant portals. Moving on is the tenant’s choice and not about when the landlord needs to cash in their investment. Planned maintenance keeps the systems running, while the manager reacts immediately to sudden surprises.
Professional property management is not cheap, but it is covered by the rent so is of no concern to the tenant. It does, however, affect the viability of the product and viability is currently a hurdle that is holding back the ever-growing field of experienced professional landlords trying to get into the market.
The private rented sector could quickly deliver a substantial number of new, fit-for-purpose properties into the market, but while land prices are based on build to sell (to the highest bidder no matter where they come from) rather than hold to rent (for a minimum of say 10 years with locals given priority) then that hurdle can only be cleared by the runners with pockets deep enough to overbuy their way in or the lucky runners who find themselves faced with an opening.
Harry Downes is managing director at Fizzy Living