One of the features of the housing market since the downturn has been that some households have chosen to rent, either taking a break from home ownership or in the case of the lucky first time buyers sitting on a sizeable deposit, delaying the decision to make their first move onto the housing ladder.  

For both groups, the relative costs of buying versus the costs of renting is critical both at a given entry point and in the future. Simply comparing mortgage interest costs against rental costs is a start point. For example, for someone looking to buy a two-bedroom property at £150,000 with a 25% deposit, interest payments of just under £4,000 per annum would compare favourably to rent of £9,150, assuming a rental yield of 6.1%.

This simple analysis suggests that despite high lenders’ margins, the so-called ‘dead money’ of renting is a high price to pay. But this is before taking account of the additional costs of ownership, such as repairs and insurance, or the cost of funding mortgage repayments at a time when interest-only mortgages are a rare commodity.  

Buyers should also take account of the income their deposits would deliver if invested rather than being tied into a property. On the basis of the same example that would swing the balance in favour of renting, with home ownership costing £1,300 more than renting over the course of a year.

Watching the market

At the peak of the market the additional cost of buying was substantially higher because both mortgage rates and returns on savings were higher and the relationship between house prices and rents had become out of kilter.

Scroll back 10 years and the cash comparison was much more like today’s, though lower house prices meant lower capital repayments, making it cheaper to buy than to rent both before and after accounting for the costs of ownership.

What distinguishes then from now are the house price growth prospects. In 2001, prices rose by 25%. A decision to delay moving and staying in rented accommodation could therefore be very costly indeed. By contrast, with further small house price falls forecast in the short-term, there is no rush to beat price growth – just one among many reasons why housing transactions remain depressed.

Prospective buyers should watch the market carefully. As house price growth returns so the balance will shift again. This will be seen first in London and the South East where house price growth is expected to return more quickly and more strongly. And this is likely to be particularly relevant to those more mature households who have taken time out of home ownership. Despite lower rental yields, and therefore lower relative rental costs, recovery is expected to be stronger in these equity rich sub-markets, potentially bringing such households back into the market ahead of first time buyers lucky enough to be sitting on a deposit.

Taken from
Residential Property Focus 2012 Q2