Renting is the new buying may seem a slightly facetious phrase – naff even – but it seems to be coming true.
The latest example of this trend is contained in a survey by Countrywide which revealed that in 2017, tenants in Britain paid a record £51.6 billion in rents, an increase of £1.8bn on the previous year and more than twice the £22.6bn in 2007. The total rent bill was, therefore, not too far behind the £57.4bn paid by mortgagees.
Coincidentally, just a few days later the Institute for Fiscal Studies (IFS) published a report of its own, which stated that today’s young adults were “significantly less likely to own a home at a given age than those born only five or ten years earlier”. The results themselves were stark: at the age of 27, those born in the late 1980s had a home ownership rate of 25 per cent, compared with 43 per cent for those born ten years earlier.
The fall in home ownership has been sharpest for young adults with middle incomes. In 1995–96, 65 per cent of those aged 25-34 with incomes in the middle 20 per cent for their age owned their own home compared to just 27 per cent 20 years later.
The IFS believes “the increase in house prices relative to family incomes fully explains the fall in home ownership for young adults”. Far be it from me to argue with such an august body but the rising gap between incomes and house prices is only half the story. The large deposits required must be a contributing factor even if I can understand the reasons behind these (although the original problem – negative equity caused by fairly cavalier lending guidelines – was largely one of the lenders’ own making).
Established thought is that this trend towards renting and away from owner-occupation is a negative development. While sympathising with anyone keen to make the transition to owner-occupation but struggling to do so, I take a more positive view that the process is opening the door to a more diverse housing market with enhanced freedom of choice.
Many of the people to whom my company rents do so for various reasons (although large mortgage deposits are often the deciding factor). However, a small but significantly growing number – either through circumstance or design – have taken to renting per se.
Until recently those choosing renting over buying did so mainly because of transient lifestyles – i.e. regularly moving between jobs or locations. Now they have been joined by “lifestyle tenants” for whom renting provides a standard of accommodation they could never afford as owner-occupiers. Like most consumer products and services, the bigger and better property you rent the greater the value for money (in pro rata terms) over “cheaper” alternatives.
Of course this raises the prospect of the lifetime tenant reaching retirement age without amassing a capital asset as an owner-occupier would have done. To get round this, more financially-savvy renters are hedging their bets by becoming landlords themselves – usually buying a smallish flat in an in-demand location with a good record of capital appreciation and using rental income to cover mortgage and maintenance costs – and perhaps even provide a small overall surplus.
Critics of this option may point to yet another new survey – this time from the Halifax – which claimed the average outlay on a three-bedroom house (in favour of buying) had narrowed over the past ten years. The figures for Scotland are £521 per month (buying) compared to £593 for renting.
Significantly, however, the survey mostly covers the period since interest rates have fallen to a record low. So one must conclude that this gap is likely to go into reverse (in favour of renting) if, as expected, interest rates rise again over the next few years. So for any lifestyle tenant considering a rental investment as a fall-back option, now may be the time to act.
David Alexander is MD of DJ Alexander