News and Press releases

Renting a home can be cheaper than you think

16/07/2009

So, it is more or less taken for granted that when the market does eventually recover from its current slump, individuals, couples and families will plough back into owner-occupation much as they were doing up to the autumn of 2007.

This, it is presumed, will include the majority of those currently privately renting accommodation, whose numbers have increased substantially over the past 18 months due to a mortgage famine.

But what if it were not to work out that way? What if, instead of retracting, private rentals were actually to increase as a proportion of total housing tenure?

This is not an outlandish viewpoint, nor is it anything to do with my own professional interest in the rental market.

Yes, the (privately-owned) housing market will recover and, yes, prices will start to rise again. But the graph showing these increases will not nearly be as steep as the one we have become used to in recent decades. This, then, raises the spectre of renting possibly becoming the long-term option for a large segment of households of various ages and social classes, and not just the younger, semi-transient group it appeals to now. In other words, rather than a stop-gap, renting may actually become their preferred method of tenure.

There are signs of this already. According to the Council of Mortgage Lenders, around 65 per cent of first time buyers in 1981 were aged 30 or under, whereas now it is just over 50 per cent. Admittedly, there are still large numbers of younger people who rent by default (e.g. because of the mortgage shortage already referred to) but the longer they remain in rented accommodation, the more “natural” it will become. Especially when they see what owner-occupation brings to relatives and friends: negative equity; stuck in a home that is too large or too small because they cannot find a buyer; the spectre of dearer mortgages when interest rates start to rise again.

Consequently, if renting became substantially cheaper, pro rata, then it is easy to see why many people would regard it as a viable alternative.

The key to this is economies of scale, i.e. providing new and second hand homes for rent in the way that the market current does for homes for sale. This could be achieved if the financial institutions were brought on board – and given that the whole industry has embarked on a massive programme of restructuring, is there a better time to make a start on this than the present?

What I envisage is a strictly commercial, market-driven programme because homes for rent would be designed to appeal to people of all social classes in regular employment, although government tax breaks might be required in certain cases to ensure working lower income families are not left out

The possible advantages are obvious. First there is flexibility. Renting will continue to be seamless, simple and hassle-free. There will be a vast selection of properties from which to choose, enabling people to move house almost as easily as they would change their car. Also, most of the new growth is likely to be in unfurnished rentals, enabling tenants to stamp their personality by choosing the furniture and fittings that most appeals to them, thus making rented property as much a “home” as an owner-occupied one.

As regards finance, most people think about owner-occupation only in terms of the a mortgage; but there is also the cost of buildings insurance, maintenance and repairs, redecoration, lawyer and estate agency fees every time you move house and, of course, the substantial stamp duty payment levied on buyers.

To a certain extent a decision on whether to rent or buy will depend largely on individual personalities. The amount “saved” every month on not having to make capital repayments on a mortgage could, for example, be used to fund a nest egg through pension contributions, building up a shares portfolio or amassing a cash sum through tax-free ISA’s. And anyone doing so will not have to sell their home to gain access to their capital.

Inevitably, there will be others who would rather live for the present and spend the surplus on exotic holidays or luxury goods. But if so, who is to deny them that choice?

Choice is the foundation of a successful, market-led economy and it should be as freely available in housing as in every other consumer walk of life.

David Alexander is proprietor of D J Alexander, the Edinburgh- and Glasgow-based firm of letting and estate agents.

THE SCOTSMAN, 16 July 2009

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