Richard and his wife are embarking on a big life change. After the arrival of their first child, they want to move from their two-bed flat in urban Bermondsey, south London, to a four-bed house in the Buckinghamshire countryside.
With a generous budget, Richard, who asked for his real name not to be used, and his wife have already identified a £1.3mn home they like. But there’s a twist: the vendor, who is mortgage free, is willing either to rent it to them or sell it.
In trying to work out the better option, the couple are wrestling with a calculation that occupies thousands of homebuyers across the UK. Are rents now so high that buying always makes more financial sense? Do high house prices and mortgage rates make renting a more affordable option? Or is there a risk that prices will fall and a mortgage signed today will be undercut by the end of the year, if interest rates fall?
“We would like to own a home,” Richard says. “In a rented house I can’t put my pictures up, I can’t redecorate as I want. At the same time, there has to be another side to the decision.”
New research by estate agent Savills has compared the relative costs of buying and renting — both nationally and in 80 cities and towns — since the late 1980s. As well as incorporating mortgage repayment costs and gross rent on comparable homes, it includes additional costs of ownership such as repairs and insurance, and the amount that would have been earned by a deposit and stamp duty had they been invested elsewhere.
It found that buying with a capital and interest mortgage is currently 11 per cent more expensive nationally than renting. The same relationship applied in the majority of locations analysed: buying was more expensive in 54 out of 80 places. These included Cambridge, where it is 25 per cent more expensive to buy than rent; Islington at 31 per cent higher; Wandsworth at 13 per cent; and Kensington and Chelsea, the traditional outlier, at 49 per cent.
But the picture is mixed. At the other end of the spectrum, in Glasgow it is 29 per cent cheaper to buy than rent; Nottingham at 21 per cent; and 17 per cent in Newcastle upon Tyne.
The greater average costs of buying over renting is historically uncommon: Savills’ calculations found there were only two other periods when it was cheaper to rent than buy, taking into account all the costs of ownership: the five years from 1988 and the six year period from 2002.
Does that suggest that house prices are set to fall, as they did in the earlier moments? Lucian Cook, research director at Savills, points to the smaller difference applying today. “When you get a big dislocation between the costs of buying over renting, then that is often an indicator that the housing market is overvalued. And you saw that happen in 2006-07 and particularly in the early 1990s. But we haven’t seen that this time round. The costs of buying have edged above the costs of renting, but not substantially.” Savills did not include house price forecasts in its calculations.
The research also highlights another unusual finding, however. Rents, which historically have risen modestly along with earnings or inflation, have surged since 2021, just as the costs of ownership have shot up. “It’s the first time we’ve seen such a strong simultaneous rise in housing costs,” said Cook.
The competition for rental homes remains intense. This week the Royal Institution of Chartered Surveyors published its monthly survey of agents and surveyors, which found tenant demand was up sharply in May, whereas the number of new lettings offered was flat. “The growing gap between supply and demand for lettings indicates that rental prices will continue to rise for the foreseeable future, albeit at a slower pace than previously,” Rics said.
As politicians set out their policy stalls this week ahead of the election on July 4, housing is turning out to be a key battleground. But while policies announced so far are largely focused on helping aspiring homeowners get on the housing ladder, there is little that addresses the supply and demand crunch in the rental market. One Conservative idea is to offer a temporary capital gains tax relief to landlords who sell to their tenants. Housing market experts, however, suggest this is only likely to reduce the number of homes in the private rented sector.
While the costs of renting are rising, the market for first-time buyers is hardly moribund, however, with strong demand over the past two years. Buying may be a lot costlier than it used to be — but so is renting.
“All of the uncertainties in the private rented sector — the level of undersupply, the difficulties of securing a rental — have meant that, despite higher costs, you’ve still seen first time buyers go into the market,” Cook said. The typical attractions — security of tenure and the broader benefits of ownership — still apply.
For aspiring homebuyer Richard, rental or mortgage costs are not his priority: he is chiefly concerned about the prospects for house prices should he buy. He is more worried about prices heading south in the area of his target property, after demand during the Covid pandemic drove them to new heights. “That growth is tapering off and coming back to more realistic levels,” he said.
His concerns are reflected in data on house prices across the UK, which suggest price growth is broadly flat. After two months of declines, for instance, the Nationwide house price index was up slightly in May, with a 0.4 per cent rise that brings annual growth to 1.3 per cent.
So where do Richard’s calculations leave him? The monthly rental on the property he is considering is £3,400. If he were to take a mortgage on 50 per cent of the property’s value — putting down a deposit on the other half — he calculates that the monthly mortgage payments would amount to around £3,500. But this small gap widens when maintenance and other costs associated with ownership are taken into account.
With a high level of confidence in his financial nous and a background in commercial property, Richard is instead minded to remain in east London for a little longer, and secure a strong investment return from the money that would otherwise have gone to pay for the house deposit and stamp duty. Any gains would be used to offset his rent. So for now, Richard and his wife remain tenants — without giving up on the homeowning dream.
