To rent or to buy – that is the question

Recent figures suggest rental prices are now higher than average mortgage payments. Laura Edgecumbe-Ansdell investigates whether the time is ripe for ftbs to swap renting for a mortgage

According to recent research by property website Zoopla.co.uk, buying a home beats renting in 74% of cases in the UK, with average monthly mortgage repayments being 8% lower, on average, than the cost of renting: and this even applies in London, despite the high cost of property. So why is this the case? Will it remain this way for some time? And is it time to ditch the rent payments and sign up for a mortgage? It is not something to launch into without a great deal of thought.

Increase in rental demand
According to the Royal Institute of Chartered Surveyors (RICS), rents increased in July across all regions, particularly London and east England. This was due to increased tenant demand and a shortage of rental properties.
With no sign of a let-up, the outlook for rents suggests a continued rise. Most surveyors expect rents to increase over the next quarter.

Rents rising
Additionally, landlords increased rents for the sixth consecutive month, raising them 0.5% in July, according to lettings agent LSL Property Services (LSL). The average UK rent is now £676 a month, 2.3% higher than a year ago.
LSL spokesperson David Newnes says: "The recovery in prices 12 months ago caused an exodus of accidental landlords from the market, ending the glut of supply of rental accommodation. Although house price rises have levelled off, landlords are still reaping the benefits of the constrained supply. We don't expect rents to fall away any time soon."

House price recovery
Over the past year, property prices have enjoyed something of a recovery. The July data from the Land Registry shows an annual increase of 6.7%. However, the rate of increase is slowing, appreciating only 0.4 % from June to July.
According to the Hometrack property intelligence service, the asking price of houses fell by 0.3% in August this year.
During the rest of 2010, Jones Lang LaSalle expects a decline of 3.9% on current price levels, reducing the value of the average UK property by £6,500.
James Thomas, Head of Residential Development and Investment at Jones Lang LaSalle, says: We are definitely seeing signs of a slowdown in capital growth across the UK housing market. As a result, sellers will be forced to adopt more flexible pricing strategies over coming months as the balance of power once again shifts in favour of buyers."
affordable Buying
According to Halifax, monthly mortgage payments as a percentage of income are now half 2007 levels.
The proportion of a new homeowner's disposable earnings devoted to mortgage payments has fallen from a peak of 50% in June 2007 to 28% in June 2010.
In addition, the outlook is particularly good for ftbs, as 94% of first time property purchases are now exempt from stamp duty, with 54% of ftbs saying this factor helped them buy their home.
Though tighter lending criteria has deterred some ftbs, Halifax believes the environment may be improving.
Only 3% of ftbs say a lack of mortgage products has prevented them buying a home, and 80% of ftb mortgages are approved.

Regional variations
The Zoopla.co.uk research, however, found that there are regional variations.
Dundee tops the places where buying is the best option, along with London, Birmingham, Derby, Cambridge and Milton Keynes. Renting is a better option than buying in Huddersfield, Oldham, Brighton, Swansea and Edinburgh (see Zoopla.co.uk regional price grids above).
Nicholas Leeming, Commercial Director of Zoopla.co.uk, says: "Conventional wisdom that buying is better than renting in the property market holds true for most places around the country. However, there are places where renting is the better option. This may be driven by an excess of buy-to-let flats or a shortage of properties for sale."

The whole story
Buying is a huge financial commitment, so it is worth bearing in mind the bigger economic picture along with your personal long-term aims and priorities. But this current environment of high rents and cheap mortgage payments will not last forever.

Interest rate increases on the distant horizon
Mervyn King, the Governor of the Bank of England, has said that it will be some time yet before interest rates increase. But they will increase at some point in the future, with most commentators suggesting it will happen within the next couple of years.
Zoopla.co.uk suggests a mere 1% increase in the bank base rate would significantly turn the tables, making renting cheaper than buying in 80% of locations across the UK.

Cost of living and tax hikes
And ftbs need to consider other factors, which could increase their monthly outgoings. Estate agent Hamptons International says: "Planned tax increases in the new year, notably the VAT rise from 17.5% to 20%, will ensure that homeowners who are just managing to cover mortgage costs will be placed under even greater pressure to find savings elsewhere."

Capital appreciation
One of the biggest attractions of buying rather than renting is the potential for capital appreciation. When you rent a property, you get the use of the property but nothing else. When you buy, if the property goes up in value, you pocket the profit, helping you move up the property ladder. But those who bought just before the credit crunch found they had bought their properties at a peak, and the values have since fallen. This can cause serious problems if you want to sell as you will be in negative equity. One can never assume property prices will always rise.
For some first time buyers their current finances, employment prospects and deposit size may mean they are not in a position to hand in their notice to their landlords and take out a mortgage. But for those in the right situation, the time may be ripe to get on the ladder now. Property prices are still relatively good value, mortgage deals are getting cheaper, and rents are at an all time high.