To buy or to rent……that is the question
Back in 1996 more than 90 per cent of young adults would have been able to buy a home in their local area. Today that figure is more like around 60%. House prices have risen by 173 per cent since 1997 compared with real incomes of only 19 per cent. It means the share of 25 to 34 year olds who own their own home have fallen dramatically in the twenty years to 2017, according to new figures from the Institute for Fiscal Studies. Numerous government schemes have been launched in those years to try to deliver on the expectation that we can all own property. Few have had any effect other than to push prices even further out of arm’s reach.
So is it rent or is it buy? And if you know you won’t be in a position to buy, what does your financial future look like? There are many schools of thought on this.
We’ll start with the bad news
Not forking out a huge lump sum won’t leave you any better off, in fact one of the reasons for pushing home ownership is that you will pay far more for your rent over the rest of your life than you’d pay in mortgage costs, with no asset at the end of it. There’s also the small matter of trying to find rent each month after you retire. If you rent in the Halesowen for 25 years you will spend in the region of £180,000 just in rent (based on an average home of around £600 per month) and this is likely to get higher following the tenant fee ban being introduced in April 2019. Average rents across the UK rose by 1.7% in September 2018 compared with the same month last year. However, this week’s second reading of the tenant fee bill along with the current political climate and previous restrictions on the buy-to-let sector is creating a recipe for increases in the UK rental sector. Brexit aside, the perseverance of the government to re-level the lettings playing field in favour of the tenant is going to exacerbate the current friction point rather than reduce it.
But there is also good news?
Believe it or not there are positives.
As a renter you have none of the ongoing costs of owning property, including maintenance – often forgotten in renting versus purchasing comparisons, any issues with the property go straight to your landlord. In the long term a mortgage is cheaper but rates are incredibly low right now. In the 1980's mortgage rates were in double figures so the cost of borrowing was significantly more expensive. There are no costs associated with trading up either. When you take into consideration Solicitors fees, estate agent fees and new mortgage fees to stamp duty, the process of buying, selling, and moving home comes in at an average of £12,000 each time, according to new research from Lloyds Bank.
It’s also important to remember that if you are a good tenant, you put yourself in the driver’s seat. All a good landlord wants is a fair price and for the tenant to look after their property. Also don’t forget that as a renter you’ll be much more flexible when it comes to school catchment areas or career relocation.
You can also focus on building up cash for other opportunities and there’s always the potential to look at buy-to-let investments yourself in cheaper areas and become a landlord yourself. Doing this can negate the scenario renters refer to as ‘dead money’ If you are on the property ladder yourself as a landlord you have the income from your investment property to help towards the house you live in and then get the capital gain from the investment for your retirement. Remember though that prices can go down at times as well as up!
How you do it is up to you……so to rent or to buy
That really is the burning question