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Returning to Rent- Has UK Home Ownership Reached its Limit?

So, it’s official- renting your home is due for a comeback. Our new Prime Minister Gordon Brown has pledged three million new homes by 2020, many of them to be rented by tenants via local authorities or housing associations. Though his speeches tend to highlight the social ills of the UK’s housing shortage- such as families with young children having to stay in poor quality temporary accommodation- the distorting effects of the house price boom on the economy over the past ten years are probably more on his mind.

Like the doctrines of a totalitarian state, the message of home ownership has been hammered home relentlessly to a whole generation. Every ‘Phil and Kirsty’-type TV property show has repeated the mantra to that week’s subjects- getting a foot on the property ladder is essential, as with rent you are just paying out ‘dead money’. Never mind the massive, long-term commitment being undertaken- as Kirsty told a hesitant young couple recently, “It’s simply madness to be paying someone else’s mortgage!”

But with the average house price for first time buyers now nudging £160k - and interest rates on the rise to boot- many are being priced out of the market altogether. Indeed, a recent report by the market Jeremiahs at Housepricecrash.co.uk said that over 10 years the proportion of first time buyers in the market has declined from 55% to just 29%. There appears to be plenty of slack for the rental sector to take up.

A Popular Dream, Now Levelling Out?

The dream of property ownership has certainly proven enormously popular in the UK since the Second World War. In 1953, just 32% of English households owned their own home, but by 2000 this had risen to around 70%, remaining steady ever since- this happening while the total number of households more than doubled from under 10m to 20.8m today.

But trends like this cannot carry on forever. In March this year the annual Survey of English Housing reported that the number of owner-occupied homes in England had fallen slightly (by about 25,000) for the first time since official records began in 1939. The survey also showed a revival in the private rented sector , with the number of homes lived in by tenants rising from 2.1 million in 1997 to nearly 2.5 million last year. The recently rampant buy-to-let market has been busily feeding this demand, and now Mr. Brown wants local authorities to play a much bigger role as well. Could UK home ownership levels have reached their peak?

Dead Money, or Just Less Money?

Traditionally, the monthly cost of mortgage repayments has been significantly less than the rent for a similar property. After all, the landlord needs to price in the risks of ownership, such as having to foot repair bills when things go wrong. But is this still the case?

Every year Abbey produces a UK-wide ‘Rent v Buy’ survey, adding up and comparing the costs of home ownership with those of renting over a typical 25-year mortgage period. The trends shown in this annual report are clear- with the high end of the house price boom reached, and mortgage interest rates creeping upward, the gap in costs has narrowed and in many cases renting is now cheaper than buying . Over the whole UK renting saves an average of £24k over the quarter century according to the latest report (total cost £379k versus £403k buying = a 6% saving) - though, as with anything to do with the property market, ‘location, location, location’ is a vital factor. For example, the biggest savings for private tenants can be found in Wales (£27k = 8%) and the south-west of England (£21k = 5%), though buying is still a much cheaper option across Scotland (£70-£81k = 20%).

Renting v. Buying: Pros and Cons

Before we get too excited with the big ‘savings’ to be made by renting in certain parts of the country, we should note that this is not an exact like-for-like comparison. The most significant advantage of a mortgage is that you actually own the property outright after the 25 year period- it’s yours to live in rent-free, sell or pass on to your children as you wish. And of course in a rising market any capital appreciation is yours, even if you sell up before the 25 years is out.

However, renting certainly has its advantages too:

• If house prices fall, you are shielded from the nightmare many faced in the early 1990’s- negative equity - your mortgage being greater than the current market value of the house.
• Flexibility - most tenancies are of six to twelve month’s duration. At the end of this period you can walk away without any further cost or obligation- ideal if your future plans are uncertain. Just consider factors such as local availability of work and possible future divorce/separation- are you really that confident about seeing 5 years into the future, let alone 25?
• Speed and moving costs - it is usually possible to move into a rented property within a few days of seeing it. Buying can take three to four months of sometimes tortuous and stressful negotiation, with stamp duty and legal fees to pay up-front.
• Convenience - repairs and maintenance are usually the responsibility of the landlord. This could be important for those who work long hours or don't have the inclination to undertake or supervise repairs. It also makes it easier to plan household budgets accurately.

Dealing With Landlords

An ogre looming nearly as large as the mother-in-law in popular culture of the past, the landlord is someone you need to get used to dealing with when renting. Speaking as the son of a man who was a landlord for many years, I can assure readers that most of them are fine- provided you don’t trash their property in an weekend-long party. However, even if you are unlucky enough to pick the odd dodgy apple, these days knowledge of your basic rights is much easier to access via the internet or tenants’ groups.

Probably the most ancient and important right enjoyed by any tenant is that of ‘quiet enjoyment’ of the property leased. This largely protects tenants from threats, harassment and other unwarranted interference from the landlord- so you can still regard your home as your castle, even when renting.

Moving onto financial matters, the deposit paid up-front by the tenant has often been a large a bone of contention. Many unscrupulous landlords have in the past simply viewed this money as extra income, to be retained at the end of the lease on the spurious grounds of ‘damage’ done to the property. However, in April 2007 the compulsory Tenancy Deposit Scheme (TDS) came into effect, compelling landlords either to pay all deposits received into the Deposit Protection Scheme, or to register (for a fee) with one of two other schemes that allow their deposits to be retained. In any case, the effect is to insert a third-party dispute service into any disagreements, raising the overall level of professionalism and fairness in the landlord-tenant relationship. Indeed, the website of the Residential Landlords Association now advises a couple of months’ rent in advance as the better option in many cases.

Doing it Continental Style

Our laid-back cousins over the channel tend to shake their heads in bemusement when they see potential first-time buyers in the UK becoming stressed over unaffordable housing. Holland, France and Germany all have a much livelier culture of renting- particularly among the young- with levels of home ownership much lower than our 70%. The benefits to their respective national economies in terms of financial freedom and mobility are incalculable.

Ultimately, deciding whether buying or renting is the best option for you depends upon your personal circumstances. Putting down roots and embarking upon a large 25-year investment might be a good idea for those at a certain point in their life or career, but renting may be better for those requiring convenience and flexibility. Certainly now that house price inflation looks like flattening out, renting has got to be better than buying and moving on every 2-3 years.

Though he may not inspire as much enthusiasm, you may well be better off listening more to the Prime Minister, and less to Phil and Kirsty.

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