After surging increases in private sector rents over the past 18 months, the average tenant is now paying more to live in a property than an owner-occupier making monthly mortgage repayments, according to new research.
It is now more cost effective to buy – on a mortgage costing five per cent – than to rent in eight out of ten British towns and cities, says the property website Zoopla.co.uk.
Zoopla says the financial gap between renting and buying has been widening since mid-2010, when renting was 8.7 per cent more expensive.
Its research is based on the cost of running a two-bedroom flat in the 50 largest cities and towns around the country and assumes an interest-only mortgage at five per cent as a basis for comparison.
In some locations, rents have risen so strongly that tenants pay far more than owner-occupiers.
In Milton Keynes, rents exceed average mortgage servicing costs by 42 per cent – average monthly rents at £785 leave tenants some £2,772 a year worse off compared to owners.
Completing the top three places of most expensive rentals, Walsall tenants pay 38 per cent more than mortgage servicing costs, and Birmingham 35 per cent. A further nine of the largest 50 towns and cities have average rents exceeding mortgage payments by more than 20 per cent.
Several factors are driving rents higher: the severe shortage of mortgages has kept many potential first-time buyers in the rental market. Meanwhile, the combination of stagnant house prices and low interest rates has cut the monthly cost of home ownership.
Even in London, which has the highest asking prices in the country, buying is still the more cost-effective option. With an average rent of £2,252 per month in the capital, buyers stand to save £4,656 annually compared to renters.
However, there are still some locations where renting is more cost effective than owning.
In Plymouth, for example, the average two-bedroom flat costs £581 per month to rent, against £156,435 to buy, leaving renting £71 a month cheaper than the average mortgage servicing cost.
Following the buy-to-let boom with investors buying properties in Plymouth to attract the large student and military population, the extensive supply of rental property has pushed rents down.
Nicholas Leeming at Zoopla.co.uk said: “While lenders maintain their vice-like grip on loans, more and more would-be buyers have to rent instead of getting on to the housing ladder.
“Rents are likely to rise further as a result and tenants will continue to pay a significant premium for being stuck in the sector.
“While buying wins out over renting today, the impact of a possible rise in interest rates cannot be ignored. If interest rates rose by one per cent and rents stayed the same, renting would become more cost effective in 78 per cent of the locations studied.”
Agents specialising in lettings expect demand for rental property to far outstrip supply in 2011 and well into 2012 “because of broader issues of diminishing housing supply and lending drying up,” says Ian Potter, a director of the Association of Residential Letting Agents (ARLA).
Some 40 per cent of ARLA members expect more private landlords to enter the market during the next year.
Potter continues: “Research shows 41 per cent of young low-to-middle earners living in private rented accommodation, compared with 14 per cent in 1988. This trend looks set to continue while the capital barriers to home ownership appear so entrenched.”