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Renting or buying: which is cheaper?


Published: 14 March 2012 | Author: Bernard Clarke

Is it cheaper to buy or rent? An old chestnut it may be, but this question has been attracting renewed attention recently. In this article, we provide an abridged summary of our new research comparing the costs of renting and buying.

With first-time buyers in 2011 experiencing their lowest monthly mortgage costs relative to income for eight years, and with rents rising, it would appear at first glance that the scales may have tipped towards buying. However, the evidence to support this is contradictory. Recent research from Halifax suggests that it is over £100 cheaper per month on average for first-time buyers to buy than to rent. But using a different set of data and assumptions, CBRE research indicates that renting may typically be the cheaper option. This suggests a close call.

Using new data from the Valuations Office Agency on typical rents paid across England, broken down by property size within each local authority, we have been able to combine this with data from our regulated mortgage survey (RMS) covering first-time buyers over the same 12-month period, to compare the relative costs of buying and renting on comparable property. This detailed analysis provides a much closer comparison of rent and buying costs than has generally been available.

At first glance, first-time buyers generally pay less than they would to rent

All across the country, most first-time buyers’ mortgage repayments (including capital) were lower than the typical cost to rent a property with the same number of bedrooms in the same local authority (Chart One). Some 70% of first-time buyers paid less on their mortgage (including capital) than the equivalent rent. And looking solely at the interest element of mortgage payments, virtually all borrowers - 92% for the UK as a whole - pay less to buy compared to rent.

Chart One: First-time buyers, percentage paying less than rent

Source: CML Regulated Mortgage Survey and Valuation Office Agency
1. Data relate to the period Q4 2010 – Q3 2011
2. Figures taken from sub-sample of 82,000 RMS records for which property characteristics are available.
3. VOA data on median rent achieved is matched to RMS records for a property in the same Local Authority with the same number of bedrooms as the actual mortgaged property.

But what about the deposit?

The main factor that tips the balance away from such a clear price advantage for buying occurs when the deposit is taken into account. The typical first-time buyer deposit through the comparison period was 20%. So, comparing just the typical 80% mortgage element of a purchase against the cost to rent 100% of a similar property is a skewed comparison in favour of the mortgage.

Using RMS data, we can adjust each individual transaction to simulate what the equivalent mortgage payment would be if the loan-to-value (LTV) ratio had been 100% in each case. On this deposit-equivalent basis, full mortgage costs are usually higher than rent.

As Chart Two demonstrates, on this basis only one-third of first-time buyers have total mortgage costs (including capital) that are lower than the equivalent rent. However, 79% of first-time buyers would still pay less on mortgage interest than they would to rent.

Chart Two: First-time buyers, percentage paying less than rent (normalised for LTV)

Source and notes: as for Table 1.

But tenure choice is not just about relative costs

Whatever the basis for comparing housing costs, over the long term the odds are weighted very much in favour of owner-occupation. Mortgage payments are anchored to a nominal debt and so decrease in real terms over time. And, after the mortgage is paid off, the costs (other than maintenance) cease completely. By contrast, rental costs continue indefinitely – and are broadly linked to house prices and incomes so do not decrease in real terms.

CML consumer research into tenure aspirations consistently shows that a majority of people aspire to be home-owners in the long term. Most recently (2010), 79% of respondents currently renting in the private sector indicated that they hoped to be home-owners in ten years’ time, but a somewhat lower 54% hoped to be owner-occupiers in only two years’ time. Part of this difference between short and longer-term aspirations may signal households’ realistic assessment of when home-ownership is achievable and desirable.

Where next for tenure choice?

As our analysis demonstrates, it is possible to construct a perfectly valid case for arguing that either buying or renting is more affordable, depending on what is and is not included. What is abundantly clear is that whether or not deposit considerations are factored in is a crucial determinant.

Our analysis here presents only a snapshot of comparative costs. Market data show rents rose by 4% in 2011, while house prices were broadly flat, indicating that over this period, rental costs increased compared to buying. But a year’s comparison does not tell the full story. The increases in rents in 2011 followed a rapid decline and subsequent period of stagnation seen from late 2008. Rents did not recover to 2008 levels until late 2010 and, while rents rose by 4% over 2011, they are only 3.5% higher than the previous peak (in August 2008).

Broadly, we can find no conclusive evidence that renting is either more or less affordable than buying in the short term. This suggests to us a picture of a housing market where the tenures are in broad equilibrium. 

The majority of households aspire to be owner-occupiers in the long term, and the rewards remain firmly entrenched in our nation’s psyche. But for households unwilling or unable to take this step, the private rented sector fulfils a vital role in providing good quality housing at a market-determined price that appears consistent with expectations.