To rent or buy that is the question

The solution to the shortage in housing is to build more houses, and make it easier for people to get on the property ladder. However, our opinion is that this theory is flawed and they need to rethink

In many countries renting a property is the norm. However, in the UK it is a given that most people will at some point buy and own a property.

The pressure to own is enormous.

This is fueled by explosive articles focusing on how much money is wasted on renting, and how it is now almost impossible for younger people to get on the property ladder.

The challenge is that politicians, of all parties, are keen to show how they will make it easier for people to buy and get them out of the rental market.

If we take a step back, it begs the question as to whether the thinking is wrong.

Renting or buying a car?

For those who own a car there are a number of costs. There is the outlay; this can be either as a cash lump sum or a loan from the bank or a combination of the two. However, there are costs on top of this – servicing, breakdown, insurance etc.

The older the car the more costly it is likely to be. However, to buy a new car is out of reach for many as a pure cash purchase.

But what is now on offer is the ability to lease or buy a new car for a fixed monthly payment. Often these offers include costs like servicing, breakdown and sometimes insurance.

For those who can afford the monthly payments this may be an attractive alternative to buying a car outright. Effectively you are renting a car; and have a choice to return the car, opt for a new car or pay off any outstanding loan and keep the car.

It seems a good system, and there are similarities to renting vs buying when looking at houses.

Renting or buying a house?

The rental market can work in the UK but many tenants are at the mercy of the landlord.

The idea of renting a property for life is almost non-existent. This makes it very hard for a family to make a property their own. In Europe it is very different.

Take Germany as an example; there is not such an obsession with homeownership and this is a big difference compared to the UK, and something the politicians and journalists should focus on. In fact, in Germany 42% of people rent; the highest in the whole of the EU.

Whilst in the UK the politicians keep insisting more houses are built for people to buy, in Germany there is a good supply of rental properties. In Berlin the rental property share is 90% of the total residential market and in Hamburg it is 80%, in other areas it is lower (source: CB Richard Ellis).

The other difference is that lenders are more careful, normally requiring a 20% deposit or substantial collateral, and proof of good earnings for several years, which for many buyers would be impossible.

Tax in Germany also makes home ownership unattractive, not only is there a standard yearly property tax (average 1.9%) but also a property transfer tax of between 2.5% and 6.5% (source: justlanded.com). As the rental market is better controlled there are many things that the UK could learn from:

  1. There’s more to rent, its transparent and there is a tenants’ association which can help mediate where rents are too high
  2. Rents are tightly controlled and cannot normally be increased by more than 20% over nominally three years
  3. Unlimited contracts are standard and tenants, if giving notice, can demand continuation
  4. Deposits are normally for three months and must be repaid with interest on moving out
  5. Because tenants rent for the long term, they may do some renovating

In the UK crucially very little of these types of controls are in place and therefore renting feels short term, and there is no real ability to consider a rental property as a home.

Why consider renting?

If there was a greater focus on renting then not only would it change people’s perception but there are some considerable benefits for the tenant – the landlord must for example:

  1. Insure the property
  2. Look after and pay for the cost of repairs to the structure and exterior, as well as electrical, heating, hot water and sanitary installations
  3. Ensure all gas appliances, fittings and flues are safe for use and that installation, maintenance and annual safety checks are carried out

Going back to renting a car it is the same to some extent; it is about making a choice between having a fixed cost, or ensuring you have money set aside to cover the unknown costs of repairs.

The initial and on-going cost is an important consideration; take Bristol as an example a two bedroom property will cost £900 a month to rent plus normally 4 to 7 weeks rent (£830 to £1,453) as a deposit.

To buy the same property would cost £220,000 and normally need a deposit of up to 20% (£44,000), plus money to cover the cost of the purchase and any refurbishment needed when moving in (£10,000?). The cost of a ten year fixed rate mortgage on £176,000 would be in the region of £700 to £800 per month (source: Barclays).

On paper it seems cheaper on a monthly basis to buy but if you need to set aside x amount a month to cover repairs plus the deposit and purchase fees then it becomes more expensive.

Just as an example, assuming you budget £200 a month for repairs, and dividing the deposit and moving costs over a 25 year period the actual cost of that property is between £1,080 and £1,180 per month. The reality is that it is more when you consider big costs like a kitchen, a new roof etc.

Renting can and should work but politicians need to adopt a system more akin to Germany to make it work for the long term. The reality is that they won’t because it is not a vote winner.

But no one wants to rent for life…..

It is true that no one wants to rent for life but the reality, it appears, is that we are moving towards that position. It means a number of things have to change.

Firstly financial planning has to change to reflect that individuals will likely be paying rent in to retirement and up to the point of death! Secondly, there is often a feeling of insecurity with rental property if people lose jobs, become sick etc. Individuals need to plan for these whether holding three months’ salary aside or taking out insurance protection (no different to someone owning a house). And thirdly there has to be a fundamental shift in government attitude towards buying and renting.

In Germany more people own than rent (56% own), in the UK the figure at its peak was 71% but has since declined to 67% (source: Department for Communities and Local Government). This will fall further over time and rather than focusing on getting people onto the housing market we need to focus on adopting a fairer rental system which reflects a changing society.

In conclusion

The financial meltdown of 2008 / 09 made the government accept that retirement ages had to change, and that public sector schemes were unaffordable however they continue to be blind when it comes to property. The solution to the shortage in housing is to build more houses, and make it easier for people to get on the property ladder. However, our opinion is that this theory is flawed and they need to rethink. There may be a shortage of affordable houses but if there was a radical shake up in the rental market akin to Europe this could go some way to tackling the problem. Any change has to come from the politicians.

The question is what will make them wake up, do we need a similar meltdown in the property market because currently they are blindly going down a route which will only end in failure.

Sources include: justlanded.com, Guardian, Barclays, Department for Communities and Local Government, Rightmove, Moneycorp and CB Richard Ellis

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants.The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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