For many years, rent has been called “dead money” and young people have been urged to “get on the housing ladder” so that they can put their money to good use buying an asset for themselves instead of paying their landlord’s mortgage.
Over recent years, however, attitudes to housing have been changing and so have the dynamics of the housing market, with renting becoming cheaper than buying in some of the UK’s key cities, particularly in the South East of England.
Renting is now cheaper than buying in over half of UK cities
The property website Zoopla tracks the cost of renting a two-bedroom home compared with the cost of servicing a mortgage on an equivalent property in the same area. The research assumes that buyers opt for a median-priced home and have a 90% mortgage with a 25-year term. Based on the data collected by Zoopla, renting is now cheaper than buying in 27 of the 50 cities they survey, this is a 14% increase from October 2016 when renting was cheaper than buying in only 20 of the same cities.
Not only is renting now more affordable than buying in 54% of UK cities, but in some cases the difference can be significant. In seven of the 27 cities, the differential was 20% or higher, in Cambridge it was almost a third and in London it was nearly half. By contrast, in the cities where renting was more expensive than buying, there were only four cities where the difference was a fifth or more.
The reason for the change
An extended period of low interest rates has helped to increase the effective affordability of mortgages, which play a hugely important role in the housing market.
In addition to this, over recent years, there have been various government initiatives aimed at helping home-buyers, particularly first-time buyers, which again have helped to improve affordability. This has stimulated demand in a market which has long suffered from chronic issues on the supply side, with the entirely predictable result of increased house prices.
Is this trend sustainable?
It’s hard to see how this situation can continue for much longer. Even if landlords own property outright and can therefore ignore the cost of servicing a mortgage, high home prices coupled with the government’s current approach to the private buy-to-let sector could well prove a strong incentive for landlords to sell up.
Private landlords with mortgages are facing tax and regulatory changes which could feasibly combine to give them less income with more risk, which again could be strong motivation for them to sell. Landlords disposing of properties would, of course, alter the dynamics of the housing market, potentially lowering purchase prices, or at least stabilizing them, and leading to upward pressure on rental prices due to the reduction in the number of available homes for rent. In addition to all of this, the direction of interest rates remains the elephant in the room.
Even though there has yet to be any obvious indication of rate rises in the near future, the fact that both residential and BTL mortgage applications are being reviewed in the light of potential rises clearly indicates that, at the very least, the Bank of England has the option on the cards.
Mark Burns is the managing director of property investment firm, Hopwood House.