The gap between buying and renting narrows

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1 NOT FOR BROADCAST OR PUBLICATION BEFORE HRS ON 23rd SUNDAY 23 rd AUGUST 2015 The Halifax Buying vs. Renting Review tracks the costs of buying and renting a three bedroom property faced by a typical first-time buyer (FTB) across the UK. Average buying costs include mortgage payments, income lost by funding a deposit rather than saving, spending on household maintenance and repair and insurance costs. They do not include one-off costs, such as stamp duty, valuation and legal fees. The review is based on data from the Halifax's own extensive housing statistics database, BM Solutions, the Bank of England, and the Office for National Statistics (ONS). The gap between buying and renting narrows The cost of buying a home for first-time buyers is 670 a year lower than renting, according to new research by Halifax. The average monthly costs associated with buying 1 a three bedroom house in the UK for a first-time buyer (FTB) was 666 in June 2015, 8% ( 56) lower than the typical monthly rent paid 2 on the same property type ( 722 a month). This is in contrast to June 2009, during the financial crisis, when the average cost of buying was 16% (or 1,154 per year) more than the average rent paid. Even though the average price paid by firsttime buyers for a three bedroom house is 25% higher than six years ago, the monthly costs of owning has come down as the average mortgage rate has fallen to 2.91% from 4.92%. Average rents have grown by 23% in the same period. In the past year, with the price of a typical first-time buyer home rising by 8%, the difference between the cost of owning vs. the cost of renting has narrowed from 85 in 2014 to 56 in 2015 a fall of 34%. This is partly as a result of average monthly mortgage costs rising by 40 while average monthly rents have only increased by 8 (see Table 1). Buying more affordable in London and the South West First-time buyers in London will have, in cash terms, experienced the largest benefit from buying rather than renting a home in the last year. The average monthly cost of 1,338 for those who have bought in London in 2015 compares to an average monthly rental price of 1,419; a saving of 81 a month ( 973 over the year) or 6%. Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 1

2 The second largest difference is found in the South West where first-time buyers were paying 9% less a month ( 67 a month or 808 annually) than the typical private tenant in the region (see Table 2). In the South East rental costs are marginally lower (1% or 8 per month) than buying largely as a result of house price rises but in all other regions buying costs are on average seven per cent lower than rental costs. First-time buyer numbers on the up According to figures from the Council of Mortgage Lenders, there were 136,100 first time buyers in the first six months of Compared with the same period in 2014, this represents a 9% fall in purchases (from 149,500) the first annual decrease on this basis since the first half of However, in context, with the exception of 2014, it is still the highest total for the first six months since 2009 and was 87% higher than in the first half of that year (72,700). Part of the reason for the slowdown is that supply remains restricted, with the stock of homes available for sale falling further to new record lows. Craig McKinlay, Mortgage Director, Halifax said: "Looking at monthly costs, the combination of lower mortgage rates and declining rental value over the past six years has made it cheaper to buy than to rent. While numbers of first-time buyers getting on to the housing ladder in the first six months of both 2014 and 2015 has been over 135,000 almost double the lows seen in 2009 the issue of building more new homes in the right places needs to be addressed if we are to see sustainable growth. ENDS Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 2

3 Table 1: UK first time buyer average monthly buying costs and rental payments Average monthly buying costs Average monthly rental payment % difference difference Annual Savings June % 96 1,154 June % June % June % June % June % ,018 June % Sources: Halifax, BM Solutions and ONS. 12 months to June. Rental payments are a crude, or simple, average. Table 2: First time buyer average monthly buying and rental costs by region, June 2015 Average monthly buying costs Average monthly rental costs % difference difference Annual Savings North % North West % Yorkshire & the Humber % West Midlands % East Midlands % East Anglia % South East % 8 98 Greater London 1,338 1,419-6% South West % Scotland % Wales % Northern Ireland % UK % Sources: Halifax, BM Solutions and ONS. Period covered is 12 months to June 2015 Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 3

4 Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 4

5 Editors' Notes: In previous Reviews the UK rental figures were a weighted average of the regional rental data for new loans, where weights were calculated using regional housing tenure data from the Communities and Local Government (CLG). However, as regional tenure data is no longer published the methodology in this review has been changed to using simple averages. The new methodology has been applied across all years in Table 1. 1 Average buying costs: Average buying costs include mortgage payments (weighted average of repayment and interest-only mortgage payments), household maintenance, repair, minor alterations and insurance costs and income lost by funding a deposit rather than saving. Mortgage payments are calculated from average advances made to first time buyers for each region and year published by the Council of Mortgage Lenders. The average advance for 2015 varies from 76% in London to 85% in the northern regions; the UK average is 83%. Figures relate to the first year of purchase. In previous Buying versus Renting Reviews a uniform 90% average advance had been taken for all regions and years; in this review the methodology has been changed to take published market figures for all regions and years. As a consequence of using lower average advances, average buying costs are now lower than in previous years. The new methodology has been applied across all years in Table 1. 2 Mortgage payments: Mortgage payments are the weighted average of repayment (capital and interest) and interest-only mortgage payments. They refer to the average first-time buyers with average advance data from the Council of Mortgage Lenders. Weights have been constructed using FCA regulated mortgage statistics on advances by mortgage type. Average mortgage payments (both repayment and interest-only) have been calculated using house price data from the Halifax's own extensive housing statistics database and Bank of England series on the average of UK resident banks' sterling weighted average interest rate loans secured on dwellings to households for new borrowers only. Mortgage payments refer to the average for a three bedroom house over 12 months to June for each year. Halifax research shows that three bedroom homes are the most popular property types for first time buyers getting on the housing ladder. 3 Rental payments: Average rental payments are based on rental data from BM Solutions. Monthly rents (both regions and UK) are crude, or simple, averages based on the buy to let mortgage new transactions. Income lost by funding a deposit rather than saving: It is assumed that there is a cost involved in funding a deposit which for this analysis is the monthly interest income lost from paying a deposit instead of saving it in an interest bearing account. This has been calculated using house price data from the Halifax's housing statistics database and the interest gained from an average of Bank of England quoted savings rates on instant access, notice, ISA and fixed rate bond accounts. For example, the average deposit required to buy a three bed home ( 28,933) in the UK would generate an average monthly income of just over 24. If used to fund a deposit, the income from the interest would be lost and is therefore included as a cost within the average monthly buying costs measure. Household maintenance, repair, minor alterations and insurance costs: Estimated maintenance repair, minor alterations and insurance costs associated with owning a home have been sourced from the ONS Family Spending Survey for Estimates for 2009, 2010, 2011, 2012, 2014 and 2015 Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 5

6 have been calculated using the 2013 survey data and adjusted using the CPI series on regular maintenance and repair of dwellings. Helping Britain Prosper Lloyds Bank, part of Lloyds Banking Group is playing its part in delivering the Group's Helping Britain Prosper Plan (the Plan). Launched in March 2014, the Plan sets out seven separate and significant public commitments to do even more to help address some of the big issues facing its customers and Britain today. The first two commitments made within the Plan are: 1. We will help more customers get on the housing ladder - and more customers climb up it. We are committed to proving 1 in 4 first-time buyer mortgages and 1 in 4 new build mortgages in We will help our customer plan and save for later life To find out more about Lloyds Banking Group s commitment to Help Britain Prosper, please visit Housing Economics Helpline No: housingeconomics@lloydsbanking.com "This report is prepared from information that we believe is collated with care, however, it is only intended to highlight issues and it is not intended to be comprehensive. We reserve the right to vary our methodology and to edit or discontinue/withdraw this, or any other report. Any use of this report for an individual's own or third party commercial purposes is done entirely at the risk of the person making such use and solely the responsibility of the person or persons making such reliance. " Bank of Scotland plc all rights reserved Shelley Dickinson: / shelley.dickinson@lloydsbanking.com 6