Cheaper to buy than rent for FTBs

Nia Williams

August 30, 2011

The latest Halifax Buying vs. Renting Review tracks changes in the cost of buying and renting a typical two bedroom flat for a first-time buyer across the UK over the last three years. Average buying costs include mortgage payments, income lost by funding a deposit rather than saving and spending on household maintenance and repair and insurance costs. Figures relate to the first year of purchase.

The average monthly costs associated with buying a two bedroom flat in the UK for a first-time buyer totalled £567 in July 2011, 16% (£110) lower than the typical rent paid on the same property type (£677 a month). This is in contrast to 2008 when the average cost of buying was in fact 29% (£212) more than the average rent paid.

Since 2008, the cost associated with getting onto the property ladder has fallen by 40% (£383), five times the 8% (£62) decline in the average rent paid by private tenants. The cost of buying for a FTB has fallen by 2% over the past year whilst average rental costs have risen by 6%.

The decline in buying costs for a FTB has been driven by the fall in mortgage rates and house prices since 2008, according to Halifax. The average mortgage rate for a new borrower stands at 3.84%, a fall of 207 basis points from an average of 5.91% in mid 2008. The average FTB house price has fallen by 14% to £124,378 over the same period.

FTBs put down an average deposit of £27,127 in July 2011, equivalent to 20% of the average property price. This is nonetheless 6% lower than the average of £28,751 in July 2008, revealing a small improvement over the period.

Moreover, although the transaction costs associated with home purchase including stamp duty and legal fees can also add to the overall cost of buying a property, Halifax estimates that 95% of FTBs are currently exempt from paying stamp duty. This is as a consequence of the temporary increase in the threshold for FTBs from £125,000 to £250,000.

Despite the improvement in the affordability of buying relative to renting, figures from the Council of Mortgage Lenders show that there were 84,000 first-time buyers in the first half of 2011, 23% lower than in the same period in 2008. This partly reflects the economic turbulence over the period and the size of the average deposit still required to get onto the property ladder.

Halifax estimates that the cost of buying would be broadly in line with the cost of renting if the current level of Bank Rate rose by 1.5%. In this scenario, monthly buying costs for a UK FTB would stand at £681 – that would be 1% (£4) higher than the average rent paid. However, given the uncertain economic outlook, interest rates are likely to remain very low for sometime yet.

Suren Thiru, housing economist at Halifax, commented: “The recent decline in the cost of buying a property for first-time buyers compared to renting has been substantial and reflects the drop in both mortgage rates and house prices since 2008 as well as a marked increase in the average rent paid over the past year.

“However, while these affordability gains are welcome, conditions in the housing market for those looking to get onto the property ladder remain challenging. Difficulties in raising a deposit and the current economic uncertainty are likely to mean that number of prospective first-time buyers entering the market will remain relatively subdued in the near term.”

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