When it’s time for a young person in the UK to spread their wings and fly the nest, they’re usually told to get on the housing ladder ASAP. “Don’t rent”, they’re advised, “it’s money down the drain”. But new figures from Hamptons suggest that what was once a no-brainer now takes some thinking about. Why? Because renting is now cheaper than buying for the first time since 2014 - a time when Nick Clegg was deputy prime minister and Brexit was just a glint in Nigel Farage’s eye.
A lot has changed in the last seven years, of course. It’s now even harder for young people to buy their own pad. Prices have risen faster (and higher) than one of Elon Musk’s rockets. And more and more first-time buyers have priced out of the market. It’s still taken some seismic events, however, to end up where we are today. Indeed, the prospect of home-ownership being more expensive than renting seemed incredibly far-fetched as little as a year ago.
What’s going on?
Last year, a homeowner with a typical 10% deposit would be £102 a month better off than someone renting. That’s according to new research by Hamptons. However, the tables have turned dramatically in the last twelve months. Now, Hamptons calculate that the typical mortgage costs £1,125 per month whereas the average rent is £1,054.
Although these costs vary according to the terms of one’s mortgage, Hampton’s figures are based on a typical home with a 90% loan-to-value ratio; therefore they seem representative. Homeowners with only a 5 per cent deposit have faced even bigger bills – they’ll spend almost £195 more each month (nearly a whopping 20%) than if they were renting.
It’s the same story in most parts of the country, too. In fact, it’s now only cheaper to buy in four UK regions: the North East, North West, Yorkshire & the Humber, and Scotland. The new reality is being felt most in London. In 2020, a buyer with a 10% deposit was £123 per month better off than someone renting. But this year, they’re suddenly paying £251 more. That’s a huge turnaround.
Why has this happened?
The main factor driving this topsy-turvy reality is record house price rises. Covid-19 caused people to flee city centres in search of suburban seventh heavens and rural refuges. This increased demand for a limited supply of properties. The subsequent stamp duty holiday increased demand (and therefore prices) even further.
Other factors have been in play too. For example, mortgage availability has been squeezed like a Californian orange over the last year. This has also pushed the cost of home-ownership up. In fact, it wasn’t uncommon to see 20-25% deposits last year.
However, in the last six months (partly due to government efforts) 5-10% deposits have become widely available again as buyers look to take advantage of the stamp duty stampede. But this, once again, is pushing house prices up as demand increases; so multiple factors have conspired against buyers.
It’s not just house prices driving the insanity, either. Tenancies now tantalise in city centres, for example, because rents have fallen there dramatically. And this is mostly due to the pandemic.
Lockdown persuaded young renters to return to their family home (where they enjoyed extra space), whilst international execs stayed clear of the UK altogether. Meanwhile, Airbnb owners turned to long-term tenancies (with lower comparative rents) as tourism evaporated. Rents in central London have fallen over 20% since Covid-19 reared its hideous head.
What does it all mean?
Although we might see an increase in the number of people renting in the short-term, this somewhat surreal situation is unlikely to last. House prices are artificially high at the moment – they reached record highs in May when the average home went up £3,000 in a single month – but normal service should be resumed when the stamp duty holiday expires in October.
Mortgage rates should also come down eventually; therefore the cost of buying (in relation to the cost of renting) should become more attractive. The mortgage industry has been treading water in recent weeks as lenders wait for the end of furlough and the reintroduction of full stamp duty rates.
Consequently, it’s unlikely that the long-term aspirations of young people will change because renting is temporarily cheaper. Unlike some of our European neighbours – the Germans and the French prefer to rent, for example – an Englishman’s home will always be his castle.
Culturally we remain a nation of home-owners or would-be homeowners. And our young people will always have their parents’ advice ringing in their ears: “you won’t build up equity by paying rent, you’re just paying off someone else’s mortgage”.
Mums always know best.