Home—Blog—Is buying a property really cheaper than renting? Don’t be so sure
Sep 28, 2011, 02:17
Posted byMerryn Somerset Webb
Comments (38)
Two weeks ago a small building in Wincanton went to auction. It cost its buyer £186,000 ten years ago. At the peak of the bubble, several agents valued it at £300,000 plus.
It had been on the market for two years. Offers had been made at prices ranging from £200,000 to £250,000. All had been accepted. None had made it to exchange: none of the would-be buyers had managed to actually come up with the cash.
At auction it fetched £190,000 – and only after a very significant effort from the auctioneer to get it to its reserve. That’s a peak-to-sale-price drop of 37%.
I popped this nugget of information up on Twitter (I’m @merrynsw) to show those who think that house prices have dropped 10% or so at most and have now stabilised, that they did not and have not.
One of the Twitter replies said that this is not the case. He would, he said, “hang his hat” on the sale I mention having been something to do with either mortgage fraud or a repossession. It wasn’t. And not only was it not, but nor were many of the others there.
The fact is that what is really happening in the lower part of the market is being covered up by the low volumes and high quality of conventional sales. Pick an area of the country and follow the sales in it on PrimeLocation.com or some such for a while. You will see that the occasional perfect house comes up. If it is on at a reasonable price it sells fast. Anything else does not – most sellers aren’t desperate enough to cut their prices to levels where ordinary buyers will buy.
So the only place that you are seeing clearing prices is at auction – where desperate sellers meet savvy cashed-up bargain hunters. And there, if the price you get is 40% below the price you might have got in 2007, you go away thinking you got pretty lucky.
That’s a house price crash – so much so it may even be that whoever bought the Wincanton flats has got himself a bargain.
Lead indicators for Britain's economy
However, the key point for the rest of us to take from this is that the wider market very often follows auction prices down. That’s something that ‘generation rent’ might want to bear in mind when they are told that they should buy as soon as possible, given that, in most UK cities, buying is now "cheaper than renting" - according to Zoopla, that's the case in 45 out of 50 cities in the UK.
Capital Economics have had a good look at this and I think pretty much debunked the idea that buying is a better idea than renting for would-be first-time buyers (FTBs) at the moment. They've used the example of someone with a 20% deposit looking at a £140,000 house, and assumed buying costs of £2,450. So the upfront capital needed is £30,450 (£28,000 of that is the deposit).
They assume a typical FTB mortgage of 3.29%, rising to 4.99% in two years’ time, making the monthly payments first £548, and then £647. The maintenance and insurance costs of owning are estimated at £65 a month rising at 2.5% a year.
Capital then compare that to renting a similar house at a rent of £595 a month (based on the current consensus rental yield of 5.1%). Under these assumptions, it is the case that over a five-year period, it costs around £3,000 less to rent than to buy. But this is “not the whole story”.
Let’s say house prices stay stable. By repaying some principle along the way, our buyer will have amassed equity of £13,943 to add to the initial deposit of £28,000. If he sells he’ll pay fees. So he’ll probably end up with a gain of £9,000 or so in hand, for a total of £39,493.
On to our renter. He’s kept the near-£30,000 deposit he could have used to buy a house in the bank, on a fixed rate of 4% (3.4% post tax). So he has interest of £5,092. He pays the difference between rent and a mortgage into the account too, getting an interest rate of 2.4%. That gets him another £3,224. So he ends up with £38,719. He is worse off – by £729.
However given the tiny margin here, if house prices don’t stay stable – if they fall a few percent or even 5-10% - it won’t be the tenant that will be worst off in five years, it will be the buyer. By a long way.
Is that a risk most first-time buyers should be taking?
Published in Blog More articles by Merryn Somerset Webb
May 18, 2012
By David Stevenson, May 16, 2012
By Merryn Somerset Webb, May 10, 2012
By John Stepek, May 03, 2012
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(28 September 2011, 04:33PM) Complain about this comment
Excellent piece Merryn. When I lucked out on my BTLs from 2002 to 2008, if I hadn't made a 300% killing on the capital gain, I would have made close to zero in net rent. Now I rent and get access to much better schools and other amenities than I would if I had gone all in and bought.
(28 September 2011, 04:48PM) Complain about this comment
Merryn, Given persistently low interest rates (that seem very unlikely to move any time this decade) it makes more sense to park you cash in london property than leave it in a bank account. What bank account gives you 5% a chance of capital gain.Provided the rent covers enough of the mortage costs to make a profit then prises seem unlikely to crash.I really don't see the point is waiting to buy; there is never a good time so why not now. In the current economic climate debt is still cheap, and I cannot see that changing. Can you?
(28 September 2011, 05:28PM) Complain about this comment
Principal not principle, Ms S-W. Happy for this comment not to be shown. B
(28 September 2011, 06:50PM) Complain about this comment
Anon (above) sounds like an Estate Agent. Who in their right mind whould buy an overpriced pile of bricks .. there is so much uncertainty. The health of European banks is highly questionable. There are so many doubts lingering over economic "growth" ... will you have a job in two years from now? What if some of the banks collapse .... what effect will that have?I'm Debt Free .... and loving it :-)
(28 September 2011, 07:26PM) Complain about this comment
Offers had been made at prices ranging from £200,000 to £250,000. All had been accepted. None had made it to exchange: none of the would-be buyers had managed to actually come up with the cash. ----------------Shows you how green I am at the property game, I'd have thought that made you a contract breaker. I have yet to make an offer naywhere. 2004-7: the market was simply mad and I refused to put myself into such hock. Since 2007, asking prices have been so high, I have simply not bothered. In 2009, when prices were dropping at a fair gallop, it looked as though sanity would return (after an absence of about a decade) and I would look to buy in 2010. Then madness made an unwelcome return.
(28 September 2011, 08:30PM) Complain about this comment
What a simplistic article. We should all know by now that, for the vast majority of first-time buyers, a property purchase is not some giant gambling chip. Those days are long gone, unless you have some pretty good reason why you think you might be able to add enough value to a property to make the purchase viable from an investment standpoint.Furthermore, to assess the costs of ownership vs renting over a 5-year period without reference to the back-loaded nature of principal repayments on a mortgage is misleading, not to say disingenuous.The author should know that in the early years of a mortgage very little of the principal is repaid; it is only as the mortgage progresses that a greater proportion of the monthly repayment sees its way to repaying the principal.Finally, is there not something to be said for being able to say, "this is my gaff, my home, sod the landlords, sod the world, I can do with this place what I want to turn it into a home"?
(28 September 2011, 11:20PM) Complain about this comment
Jason, I think you are missing the point, twice it would seem!Property prices are still vastly over priced, the only thing stopping them falling is low interest rates.Low interest rates will only last so long, 1 or 2 maybe 3 years, maybe less, mortgages are normally for 25 years!!!When we return to normal interest rates of 5% – 6%, what do you think will happen to house prices, you know the answer, just in case you are thick, they will come down by a considerable amount, how much, a lot and you know it.Finally, I would rather be in a rented house, making me; debt free and mobile, whilst I wait for the housing market to reduce in value at which time I will consider buying.
(28 September 2011, 11:55PM) Complain about this comment
If the boiler was to pack up that would easily wipe out the £729! ... and not having to worry about external repairs and painting windows etc makes renting the more attractive option by far - especially if you are able to make do with something small for a few years in order to save up a larger deposit...
Not an estate agent but a first time buyer who has waited far too long for prices to crash. All the money I saved is now subsiding cheap mortgages. Rounds of QE has kept the champagne flowing in the city; which as meant jobs are easy to find (for professionals) which has in turn attracted more people from all overFalling value of the pound has made UK property cheap, and with city Employment stable, a good investment.Even the government is in on the act keeping rates low. They are more than aware that if rates were ever to rise then the UK debt mountain would crumble.So back to the top: are rates going to rise? No central bank has any near term desire to raise rates for years to come. And by the time they do inflation would have eroded the value of any debt.No I don't see prices going up (or down for that matter). Long term rates will rise but this will be offset by wages that are rising also. But who can predict the future
(29 September 2011, 07:35AM) Complain about this comment
I think Merryn didn't mention a couple of points in her article.The landlord can at any time give you two months notice and you have to move on regardless.The interest in a bank account is taxable at the highest rate you pay on you earnings. Any profit you make when selling your main residence is tax-free.This is a personal opinion, but I just don't enjoy renting. It made life very unpredictable. Owning your own home means no sudden moves and you can (within reason) do what you want with the house regarding decorating and furnishing. decorating/modifying the house how you want
(29 September 2011, 08:40AM) Complain about this comment
Nearly always agree with Merryn but here she has missed the fact that if you can not get good security of tenure the costs of moving can pile up each time your lovely BTL landlord decides to either chance upping his rent or move you on. If you have a family this is even worse as obviously moving costs increase. You often have to put new curtains in these houses and buy/sell furniture depending upon the size or configuration of the house. I still feel it is a pointless time to buy however, especially with the flexibility of renting - if you see a fast buck to be made and need to move it can be achieved relatively quickly or if you have a new addition to the family you can up-size rapidly. I know a number of people with two bedders now on to their 3rd child and desperately wondering how they will ever get their third or fourth bedroom.
(29 September 2011, 11:16AM) Complain about this comment
The house next door to me in Cheddar, bought new for £150,000 in 1998 resold in 2003 for £238,000 and sold again last year for £328,000. That is a 13 year gain of 119%.You forget to say that when prices rise the buyer is sitting pretty having already bought. The renter has to find a house and go through the conveyancing etc.Buying is virtually always better than renting.
(29 September 2011, 01:15PM) Complain about this comment
Cheddar's prices are high as it is commutable distance to Bristol, is very picturesque and it has one of the best comp schools in the county, and the people moving to a property of that size/cost are not first time buyers, this keeps prices high and pushes out local people, i.e. me. Wincanton is not commutable to any large city, and too far from the coast/picturesque villages for the second homers. So demand is slightly different. I rent a lovely 2 bed flat overlooking the harbour in bristol, it costs £710 a month, there are no other costs and I walk to work. The cost of the flat would be £220,000. I cannot afford this. And i have no intention of buying the type of property £140,000 can currently buy me. I'll save and wait until interest rates go up, prices fall and the greedy have their homes repossessed.
(29 September 2011, 01:41PM) Complain about this comment
This article proves several things, 1) It is utterly pointless trying to pretend a single property represents the entire market. Merryn actually renting is an awful deal as houses on my street have gone up by 20% in 18 months......if I tried to argue that represented the entire UK market you'd tell me I was talking rubbish, as are you by arguing one house in anyway represents the opposite. 2) Your renter in your example is actually worse off, as you admit, but also they are exposed to a rise in house prices.....I hate to have to tell you this, but over the longer term the price of houses rises in the same way that the price of bread does. Your renter is just giving him/herself 5 years less time to pay off their mortgage.
(29 September 2011, 01:42PM) Complain about this comment
3) Over the very long term renting is finacially suicidal, unless you really want to be a pensioner still paying a rent, instead of owning the house you live in. 4) You cannot improve your rented property, and in many cases this means you have a lower quality of life. If you can't afford to buy and have to rent your article offers a crumb of comfort, but don't pretend it's the better option. Merryn.......do you own or rent? ( we already know the answer of course )
(29 September 2011, 01:51PM) Complain about this comment
#13 SMR. Good effort at contrasting Wincanton and Cheddar, which are similar places . In fact Wincanton is on the A303 with good links to Yeovil,Exeter and London. The train from nearby Gillingham takes you to Waterloo in 100 minutes. Hence it is in the heart of Barrister country. They like the Dorset countryside and the public shools in Bruton.Cheddar is nowhere near a railway or main road and is 22 miles out of Bristol.Your rent seems low for a £220k flat (3.8% yield) or is your landlord telling porkies about it's true value? Most city centre Bristol 2 beds are not even worth £180k.You should consider buying asap. If you can afford £710 a month you can afford a mortgage.
(29 September 2011, 02:36PM) Complain about this comment
Boris, anyone who wants to commute daily from Wincanton to London, total time of 2 hours (at least) each way is welcome to that life. Yeovil is not exactly a major city. Cheddar is 25 mins from the M4, 5 minutes from the A38 and the 22 miles to Bristol takes an hour at peak time and is heavily trafficked, i know I've done it. Cheddar is Bristol commuter country FACT. I dont live in a statistically averagelly priced flat, I live in one where the adjoining flats go for £200,000 plus. I know the price because like you I know the prices adjoining properties sell for. The flat beneath me rented for £840 recently. As for the mortgage, can you lend me £30,000 for a deposit on a 2 bed semi? cheers
(29 September 2011, 02:57PM) Complain about this comment
@ SMR - A smart 2 bed flat overlooking the harbour and a short walk to work. Sounds lovely - am very jealous.
(29 September 2011, 04:46PM) Complain about this comment
#18 Ellen. Don't be jealous he is only renting. You can stay at very nice hotels if you want , but everyone needs to own something.Renting is shortsighted and it does have costs, in that it limits one's horizons. Stuck in a flat in central Bristol probably means no garden,little access to the countryside,no car/no freedom.But the most important fact is not to look at the short term.In the long term the short term always loses.House price 1961 £2,000 --- 2011 £200,000. A 9,800% rise in 50 years. In 50 years of renting he'll pay out £450,000 with no asset to show for it,just memories.
(29 September 2011, 07:23PM) Complain about this comment
140 large? I'd want above 800 pcm for that!
(29 September 2011, 08:54PM) Complain about this comment
Quote 'Anon'."Long term rates will rise but this will be offset by wages that are rising also."I don't think so, wages in real terms are falling. A major prop to the housing market is being smothered by inflation.
(30 September 2011, 09:17AM) Complain about this comment
Jason, if you seriously think BoE base rate is going to stay at the lowest rate it has been at for 12 generations for the next 10-20 years, dream on. A chart of it can be found in Church House's Quarterly Review Spring 2011 (page 3). Like Merryn, I have it on my office wall.More to the point, it's actually not up to the BoE. Mortgage rates are linked closely to gilt rates, as mortgage backed securities have similar maturities to gilts. Sooner or later the gilts market is going to realise that Osborne's Plan A is going to result in default just a year or two later than we would have had under Labour. See Tullett Prebon's report "No Way Out" as to why. This re-rating of our Government's creditworthiness might happen next month or in five years' time, but with a Government spending 50% of GDP, taxing us at 40% of GDP and borrowing the rest, it is mathematically inevitable. And then gilts and mortgage rates will be 6% or 10%, with the obvious effect on house prices.
(30 September 2011, 09:34AM) Complain about this comment
@Boris. Why are you so involved in whether SMR want to buy or rent? Renting does offer a flexibility for these gloomy economic times. It means that if a tenant lost their job, it would be much easier to look far afield for alternative employment, and be far choosier, without having the anxiety of being saddled with a large mortgage. My money is on house prices going down but they may tread water. They are unlikely to go up any time soon so there is no real urgency if a tenant wanted to buy later. Either way, if people are happier renting, its not for anyone else to invalidate that decision.
(02 October 2011, 07:55PM) Complain about this comment
#24 Ellen . I'm sure you mean well. But would you support a persons right to drive on the wrong side of the road if they so choose?Oh, and please don't put your money on house prices going down. There is about to be a lot more money around and land values are stubbornly high.
(03 October 2011, 11:38AM) Complain about this comment
@Ellen, I don't think many people in reality choose to rent, no matter what they tell themselves. I was renting for 14 years before I bought and hated it, I was well aware that all that time I was paying someone elses mortgage off for them, if I'd been able to buy straight away I'd have been over half way through paying off the mortgage. As far as I'm concerned over that 14 year period I saw over £100k go down the drain with nothing to show for it. Everyone I know who is renting wants to buy, the only reason the market has slowed was banks suddenly raising deposit requirements, but that's slackening off now. Rents are about the same as mortgages and people who can afford to rent can afford to buy, once they have the deposit saved.
(03 October 2011, 01:54PM) Complain about this comment
@alex,Everyone has different experiences. I rented 13 different places before buying. There is no way I could have afforded deposits or have been bothered with the hassel involved in buying a house in every place/country I've lived in the last 12 years. e.g. I lived in Norwich for a year, got a job offer further north and was gone with my stuff in a hired transit van 2 months later. Never disount the flexibility that renting gives you. Purely in financial terms, I would have thought overpaying your mortgage and clearing the loan early beats renting hands down even if the price of your home drops 5-10%. If I remember correctly this was the strategy MSW was advocating a few blog entries ago.Bob
(03 October 2011, 02:05PM) Complain about this comment
My wife and I are looking to work abroad in next year or so as an experience. The way I look at it, if I needed to move for work, and need the flexibility I'd let my house rather than sell it. That way the rent your paying on house B if offset by the rent received on house A. I don't see that I have any less flexibility than when I was a renter to be honest.
(03 October 2011, 02:13PM) Complain about this comment
If you cashed out just before prices dropped you may be sitting on a nice profit - but over your entire adult life do you really think you would have been better off renting?I regard renting as short to medium term at best - you put no 'value' on the security of owning your own home and not at the whim of a landlord who may want you out. Personally I would not want to incur the costs of moving and have to find a new home for myself and family with ~1-2 months notice.
(04 October 2011, 11:13AM) Complain about this comment
Merryn, is it ever right to buy a property - either as an investor or a first timer? In a boom? In a bust? I can't recall MoneyWeek ever saying it is ... Why is that? I've blogged about it here: http://wp.me/p1BM90-17B
(04 October 2011, 03:38PM) Complain about this comment
Part 1While I agree that there may be occasions when renting is better than buying this will be based on the individual’s circumstances rather than a general right and wrong.From a starting point I would suggest taking the long term outlook say 10 to 20 years as this takes out some of the short term issues. Then establish the fundamentals such as limited land, increasing population growth, low new build volumes, lack of credit, older FTB’s, increasing cost of rents and high student debts. All these factors will increase the cost of rents over the longer term and as such will increase yield returns for property investors. It is now possible to obtain yield returns on some properties in excess of 10% after taking into account purchase costs, maintenance, agency fees and some void periods.
(04 October 2011, 03:39PM) Complain about this comment
Part 2It is also possible at present to increase yield returns by securing a mortgage on the property at rates as low as 2.99% which are now obtainable. You should bear in mind that these rates are likely to increase in the future but at present the cost of that lending is lower than inflation rates and you are effectively being given money. On this basis your yields returns are likely to be 20/30%. Instead of battling to beat inflation you can benefit from it as it eats into the mortgage and increases your rental income. And remember any mortgage costs can be offset against rental income for tax purposes. The only problem at present is finding the suitable properties to produce good yield returns and obtaining the finance.
(04 October 2011, 03:41PM) Complain about this comment
Part 3If you do find the right property then there has got to be a very good chance that the value of the property will increase as many would be investors will be after it.I have looked into this in detail and I have developed a bespoke calculator which works out yield returns based on all of the above including potential capital growth and sale costs. There are no guarantees in life just calculated risks.
(05 October 2011, 09:02AM) Complain about this comment
All I know is that at the age of 35 if I was renting and intended to rent for life ( as people often do in Germany ) and lived to 75 in my town I'd shell out a further £450,000 in rent over the next 40 years. I have 15 years to run on my mortgage which will cost me another £126,000.If I rented for life I would have NOTHING to pass on to my children, as a paid up owner from the age of 50 I will have a house to leave, and my wife will have the security of knowing that if something happens to me one of the largest expenses .....accomodation is taken care of. If something happened in the meantime I of course have life insurance to cover the mortgage. If my house was only worth £10 by the time of my death I'd still have saved @£320,000 in rent. So Merryn I really do not see how renting is ever cheaper in the long term than buying.
(06 October 2011, 01:34PM) Complain about this comment
Yes but also make sure you factor in the costs of maintaining a property. Good upkeep (heating repairs, roof repairs, plumbing, internal external decorating etc) of a property requires expenditure of between 1% to 2 % of the property value ANNUALY. Renters do not have these costs. Then there is property tax.
(06 October 2011, 02:48PM) Complain about this comment
35 coutts. You have a point,but surely 1 to 2% is a bit steep. On a £450,000 property this suggests £70,000 every ten years. I have lived at Donut Towers for 15 years and spent no more than £15,000 on such maintenance (about 0.25%).
(07 October 2011, 10:47AM) Complain about this comment
@35. Property tax ( council tax ) is paid by tenants as well as owners. Even assuming I did spend £2500 every year maintaining my house that adds upto £100,000 over the next 40 years......so renting still costs £220,000 more than buying. And at the end of it, guess what, you have nothing to show for a life of renting. Nothing.There is a reason why all of the renters on here are obsessed with the idea that house prices must fall sharply. If they were really happy renting they wouldn't give a dam about house prices, the truth it that they are frustrated would be buyers.
(07 October 2011, 07:38PM) Complain about this comment
@Alex 15 years left on your mortgage puts you firmly in the bracket of a property buyer who got his timing of the absurd UK property bubble absolutely right. A blinkered opinion of the numbers IMHO.
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