UK Housing: Rental versus Ownership – Part 1

For many years, now, there has been talk of a housing crisis. Across Britain, there has been a widely held, and loudly-argued belief that housing supply is simply far too low and that many more homes are needed to meet domestic demand.

As a result of a long term mismatch between supply and demand, house prices have been pushed steadily upward. What’s more, even amidst all the market uncertainty associated with this year’s stamp duty hike and the EU Referendum, they look set to continue on their current trajectory. The most recent survey by the Royal Institution of Chartered Surveyors found that, on average, its members expected residential prices to rise by around 3% per annum over the next five years.

That’s good news for investors who wish to see their assets gain in value, but for home buyers, it merely adds to the obstacles they face in trying to get a foot on the property ladder. The affordability of housing is often measured as a ratio of ‘average prices to average earnings’ and currently, that ratio is running at between 5.5 and 5.7, depending on which sources you choose to study. That is higher than any time since October 2007 – i.e. before the 2008 financial crisis. It means that a new home will cost the average buyer the equivalent of more than five and a half years’ salary before tax. (In London, incidentally, that same ratio now stands at over 10.)

What this means in practice is that buying a house has become progressively difficult and many first time buyers will find it impossible without the help of their families or an inheritance. The last year has seen many reports of the ‘bank of mum and dad’ coming under increasing strain as grown-up children seek desperately for a way to fly the nest. For those that can’t turn to well-off parents, there are very few options besides renting or staying in the family home.

At a national level, that difficulty has translated into the lowest levels of home ownership since 1986. According to a new (August) report by the Resolution Foundation, ownership across England now stands at 64%, which can be compared against a peak figure of 71% in 2003. (In this case, ‘ownership’ is taken to mean either the property is mortgages or owned outright.)

Looking more closely at that headline figure, it’s also clear that there’s a definite age imbalance. Ownership is proportionately much higher amongst older people – those in their 50s and 60s, and particularly amongst the retired. By contrast, the rate of ownership amongst young families and people under 30 is extremely low.

According to Nationwide, the price of an average UK home has risen by 60% over the last 13 years. That’s considerably more than the rate of wage growth, so the affordability gap has widened steadily. It’s therefore little wonder that increasing numbers of people now expect never to own their own home.

For investors, of course, this all supports demand for rentals. In that respect, protracted affordability problems on the part of buyers actually help to underpin the robustness of buy-to-let investments. However, how long can this last? The new prime minister has claimed she means to address the current housing shortage and the present economic uncertainties mean that almost nothing can be taken for granted. In part two of this article, we’ll examine these and other issues and consider how robust the private rental sector really is.