Is it really cheaper to buy than rent? The received wisdom for many people at the moment seems to be that it is and it’s not difficult to see why. With mortgage rates at historic lows and rents, especially in areas of high demand, continuing to creep upwards it would seem logical that buying is the best option. But is it that simple?
Historically, comparing the cost of buying and renting has been calculated by looking at the monthly cost of an interest-only mortgages versus the cost of monthly rental payments. Taking the latest Intermediary Mortgage Lenders Association market data and applying this logic, it would appear that, on average, homeowners save almost £200 a month compared to renters.
This comparison does have its merits but it doesn’t really reflect the true nature of today’s market. Following the financial crisis, factors such as regulatory changes and confidence issues have led to the virtual disappearance of interest-only mortgages as an option for those with anything less than a 25 per cent deposit – often more. As a result, the majority of ‘unassisted’ first-time buyers have been forced to borrow on a capital and interest basis.
When it comes to making the case for homeownership, such a shift becomes a game changer and renting seems to become the cheaper option across the whole of the UK.
However, it is not merely the disappearance of products such as interest only that have inhibited the first-time buyer market. The major barriers to homeownership are deposit requirements and house prices themselves. Monthly affordability, especially in this low interest rate environment, looks attractive. But many people simply can’t afford to raise the deposit required to buy a home, especially not in the areas they are looking to live.
Despite heavy capital requirements imposed on lenders post-2008, the market has since shown signs of recovery. Increased competition and improved market prospects have resulted in greater mortgage availability for those with only 5 or 10 per cent deposits but there is still some way to go.
Moving away from first- time buyers, there is also the issue of the often forgotten second stepper. For similar reasons to the above, it is now too difficult for many homeowners to move from their first home into a larger, better suited space. Stamp duty, house price rises, tougher mortgage underwriting and complex market conditions have all combined to make that next or final step almost impossible for a host of homeowners.
The social implications of families housed in unsuitable accommodation, as well as the idea of ‘generation rent’ are both recognised and serious. So what is the solution?
Gentle house price growth close to the level of inflation or even a little below it, would, over a number of years, slowly bring things back into line. Eventually, first-time buyers would be able to buy at an appropriate age – closer to 30 than 40, overturning the current status quo.
In the medium to long term, however, the best solution to housing affordability would be the widespread construction of suitable homes. Far from marketing these to the ultra wealthy, they would be affordable houses, made available to the right audience, in the right places and at the right time. This tactic would ultimately benefit not just first-time buyers, but also second steppers.
Stamp duty is undoubtedly a contributing issue to homeowners becoming stuck but it is the extent to which house prices have risen that has caused the biggest challenge to those wishing to move on. Increasing the overall supply of housing would gradually bring things back to a more balanced state, over a gentle and sustainable period.
Ben Thompson is managing director at Legal & General Mortgage Club