15th February 2012
This means a typical buyer on average earnings and no help from the Bank of Mum'n' Dad would be in their late forties or older when they first owned the keys to their first mortgage.
It is causing a change in society. And that will impact on many stock market sectors.
Cheaper to buy than to rent – if you can
The tenant explosion can be attributed to a number of well-rehearsed factors led by the fast soaring house prices, the failure of wages to keep up, and lenders' caution exhibited by withdrawing almost all no or low deposit mortgages.
The better off and better resourced who can afford to buy now pay less in home loan repayments each month than they would on rent – substantially less on a like for like basis. That advantage may not disappear if and when interest rates move up as landlords will also face more expensive mortgages and will seek to recoup their higher costs via rent rises.
The gap varies according to region – with the London area experiencing the biggest difference as buying is 10.2% cheaper than renting. The Halifax adds in all the costs – not just monthly payments so for buyers it calculates mortgage payments, household maintenance, repair, minor alterations and insurance costs relating to the first year of purchase. It also counts the loss of savings interest on deposits.
With a housing shortage caused by a rising population with an increased number of older people and a desire for more space – if only for the now fashionable trend among the better off to have more than 2.4 children, there is no obvious or immediate cure.
Elastoplasting the problem
The real answer is a massive home building programme. Easier said than done. But there are some short term sticky plasters such as ensuring the existing housing stock is better used. Last spring, housing charity Shelter estimated there were 288,000 homes empty on a long term basis, plus – and this is more complex – a further 252,000 second homes, mostly in tourist areas. Even more difficult to deal with are the 7.8m homes described as under-occupied, including large family homes now the province of empty nesters. Shelter suggests councils should be able to charge full rates on empty properties, that Rent a Room tax relief should be upgraded (it last changed nearly 20 years ago), and that capital gains tax should become harder to avoid on second homes.
The tenant trend and their spend
The effect on investment has been less well documented. Switching from owner occupation to tenants creates problems for some sectors.
Home ownership is a major driver of life insurance and critical illness sales. It's a simple scenario. The mortgage broker or bank asks potential home purchasers how they could pay the loan if the breadwinner died or had a life threatening and work preventing illness. Result: many sign up. And while financial advisers state everyone should have cover, there are fewer chances to sell it outside of the home loan discussion.
Savings and investment
If tenants are paying more to rent than to buy, then they have less spare cash to put away for the future. Mortgages normally become less of a burden as the homebuyer ages – many have paid them off completely by their fifties – but rents continue to take an often rising slice each year. Tenants have less incentive to create a "rainy day fund" – after all, if the roof needs repairing, then it's the landlord's job.
The retired and others on low income who own their home don't get housing benefit. Tenants in a similar position do. It's a big cost to the exchequer.
The first thing a homebuyer does is to visit the nearest big store to buy carpets, curtains, furniture, and electrical items. Tenants don't do this – they make do with what they are provided with. They have no incentive to improve where they live as they will most likely be on a six month rolling contract. Landlords will often make do with second hand or worn items as long as they still function. So sales of these items will fall.
Tenants don't bother with home improvements or repainting anything. Why should they? They have no sense of ownership. So the bank holiday rush to the local DIY outlet will become strictly past tense.
Whoever heard of a tenant taking care of a garden? And whoever heard of a landlord doing more than the minimum?
The possible solution
The biggest obstacle to tenants improving homes is the assured shorthold tenancy, a Thatcher period creation which limits most contracts to six or twelve months. It could be scrapped – or at least cease to be the dominant tenure.
The European model where investment institutions rather than buy-to-let landlords let the bare shell of a property on a long term basis would restore trade to stores, DIY sheds and garden centres – European renters will spend tens of thousands of euros replacing a kitchen or bathroom because they see it as their home. The security a long term lease gives – both of tenure and rent levels – would also enable more sensible financial advice and a greater ability to plan for the future via savings and pensions.
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