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Until the early 1990s, however, the majority of residential properties were being purchased through interest-only loans, meaning that so-called owners effectively continued to “rent” the home they now called their own.
What turned them into owners was the endowment pay-off at the end of the loan or “rental” period which for most people lasted at least 25 years, or roughly half the adult lifespan. Endowments were once thought of as highly efficient and for good reason. Backed by a booming stockmarket, they not only paid off the mortgage but in most cases also provided the policyholder with a cash bonus (and often a substantial one at that).
This all changed when the stockmarket began to falter and millions of policyholders faced the prospect that their maturing endowment would most likely fail to pay off the mortgage, never mind provide an additional lump sum. Understandably, most new borrowers opted for the safety of a capital and interest loan and this has been the favoured option of the majority for the past two decades.
But the most recent financial crisis has created a new problem. The issue is the affordability of a home loan per se, largely due to the size of deposits currently being demanded by banks and building societies.
This has led to claims this week that Britain will once again become a country of renters. With the majority of young people still aspiring to home ownership, this is generally looked upon as a step backwards but others may see it as an opportunity – for society as well as individuals and families.
The powerhouse German economy – which seems to be leaving our own at the starting gate – is driven by a nation of home-renters across all sections of society. In Britain, ownership is undoubtedly the most popular form of housing tenure but part of the reason is that renting -unlike Germany and several other continental countries – is for most people not a viable financial alternative, at least in the long term. Over the past two years our letting division has experienced an enormous rise in business from home-owners selling up and renting – but they fully intend returning to owner-occupation in a few years time.
However if a renting culture was to take root in this country and enjoyed the backing of the financial institutions then huge economies of scale could be achieved – making the cost of long-term renting highly competitive in comparison with paying a mortgage (as well as servicing the legal, maintenance and insurance costs that come with home-ownership).
But that still leaves one big unresolved issue because after 25 years a tenant will have nothing to show for all the money paid out in rent, while an owner-occupier will have a substantial capital asset.
This brings me back to endowment policies and other long-term financial investments. If the aforementioned economies of scale can make renting substantially less costly than buying (while still producing an acceptable return for investors in homes to let, of course) tenants could spend the additional disposable income on building up a nest egg for the future , comparable to owner-occupiers.
It will, of course, be argued that a money-based investment plan will never match the historical returns from residential property. However a repeat of the house price boom of the last years of the 20th century and the first years of the 21st is thought to be highly unlikely. Most analysts believe that even when the housing market starts to move in the right direction, price rises will be more measured, perhaps just above the annual rate of inflation. A vibrant, commercially-driven letting sector will further reduce the heat on house price rises, creating a level playing field which will be in the interest of all households – whether the occupiers are mortgaged or paying rent.
• David Alexander is proprietor of rental and estate agency, D J Alexander.
THE SCOTSMAN, 3 June 2011
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