News

Buying as opposed to renting

17 August 2012

Renting is less costly as opposed to buying all over apart from 2 of the UK’s 376 boroughs despite solid rental growth plus low bank base rates, reveals a new study from Savills and Rightmove.

This is primarily correct in the new period where interest only mortgages are scarce and are available at a high price, especially for first time buyers.  The latest conclusions reveal that on a capital repayment grounds and taking into consideration the initial expenses of purchasing, the normal assumption that it is cheaper to buy than rent retained by the greater number of current and wannabe home owners is mislaid.

On average, it now costs  21% or £2,068 far more in the 1st year of ownership to purchase instead of renting an average two bedroom property for those with a 75% loan to value, increasing to nearly £7,400 in inner London after capital repayments have been taken into consideration.

Whilst the majority of households fully grasp the long term financial advantages of homeownership, such as wealth generation and lower lifetime housing costs, these benefits have grown to be less achievable; as the expenses associated with the initial years of home ownership lure more people within the private rented sector. 

More than half (51%) of renters and homeowners incorrectly understand that it is cheaper to buy when compared with rent for a while.  That view is especially noticeable in London and the South East where rents are increasing the most strongly but the costs of buying are still higher. Two-thirds (68%) are of the view that it is less costly to own in the long-term.

It is nevertheless more costly to buy...

- After capital repayments it is 21% (or £2,068 a year) more costly to buy as opposed to rent the average two bedroom property within the uk and more than a third more costly to buy than rent in one in four locations throughout England and Wales (based on a 25% deposit). 

- It is 50% (or £5,006 a year) more expensive for a first time buyer with a deposit of just 10% to buy than rent the same 2 bedroom property.

- In the first quarter of this year just 11% of homeowners with a mortgage were on interest only terms, a number that falls to 3% for first time buyers.

- It is more costly to buy than rent throughout virtually all Local Authority Districts in England and Wales once ownership expenses are taken into consideration.  The only exceptions are the London Boroughs of Newham and Greenwich.

However, renters lose out emotionally and financially...

- A latest Rightmove survey found that in excess of three-quarters (78%) of consumers consider property mostly as ‘a place to live and over half say ‘owning their property when they are older’ is the single most essential factor to buy as opposed to rent.

-  But the wealth disparity is widening amongst those not able to obtain home ownership and those who can savour the increased wealth that can be accrued by means of house price growth.

- Whilst there is currently a possibility to purchase at or close to the bottom of the market in the following two years, the short term influence of higher buying costs will most likely stop first time buyers making the most of that opportunity.

- A recent Rightmove survey found that 56% of renters are ‘trapped’, planning to buy however not able to afford to, with raising ample deposit the single major obstacle for 33% of those wanting to get on the housing ladder. Emphasizing the affordability challenge of getting onto the housing ladder, 58% of intending first-time buyers are of the view that property prices within their area are higher than what is ‘fair and reasonable’.

- Savills Research estimates that over the past 25 years house price growth has meant that owning a two-bedroom property has added an average £3,500 to a buyer’s all in all wealth in the first year of ownership.

Director of Savills Global Research, Lucian Cook, says:

“Much analysis of the relative cost of buying compared to renting does not take account of the costs of capital repayments."

“In the current lending environment a calculation on the basis of interest only borrowing - which makes a renting appear around 11% cheaper - is largely irrelevant.”  

“Even for those lucky enough to have accumulated a sufficient deposit to allow them to buy in theory, in practice the additional annual cost will inevitably leave some would be first time buyers frozen out of home ownership,” say Cook.

Yet there remains a notion amongst the most of ambitious and current owner-occupiers that rent is, according to Miles Shipside, Director of Rightmove ‘dead money’.  

Mr Shipside details:

“What continues to come across is that people still want to own the place they live, bring up their family and grow old in.  They also understand that home ownership offers lower lifetime housing costs.

“But there is a lack of understanding about the relative costs of buying versus renting in the short term.  One in five in our survey admitted they did not know how to work this out.    Given the shortage of rental accommodation in many parts of the UK and the consequent pain of rising rents, it’s understandable that more than half of people wrongly believe buying is the cheaper option to renting even in the short term.”

Further, Cook adds:

“In reality aspiring homeowners need to work out whether they are able and prepared to incur the short term additional costs of buying to put themselves in a position to benefit from the longer term gains and avoid the losses associated with lifetime renting.

“Buying has traditionally acted as both a hedge against rental inflation and a means of minimising housing costs in retirement  These issues will stored up for increasing numbers of households confined to the private rented sector.”