Buying a home beats renting in 74% of UK locations

Landlord Expert
By Landlord Expert July 22, 2010 15:12

First-time buyers typically compete with landlords for the same properties and the other side of the coin is that for investors rents are higher in 74% of locations than the cost of buying, according to Zoopla, the property information group. 

This means investors ought to be able to get a healthy return on a relatively cheap investment – particularly in the light of several surveys which say that tenant demand outstrips supply in many areas. 

Average monthly mortgage repayments are 8% lower than the cost of renting in nearly three quarters of locations, assuming an interest-only mortgage at 5%. Given that interest-only mortgages, particularly for first-time buyers, are on the regulator’s hit list – but are still available for buy-to-let investors – this is good news for landlords.

Top buy-to-let areas 

So where are the areas where it is more expensive to rent than to buy? According to Zoopla, which looked at asking prices and rental values of two bedroom flats, even in London, which has the highest rents in the country, buying is still the more cost-effective option. Average rents on two-bed flats are currently at £2,155 a month while average asking prices are an eye-watering £446,345. But mortgage repayments at 5%  are lower at £1,859 a month.

For lower priced properties, investors should take a trip to Dundee which comes in top of the list of places where buying is currently the best option with average asking prices for two-bed flats at only £88,263 while average rents are £530 per month. The cost of financing a 100% mortgage (though you can’t get one) on an £88,263 flat at 5% works out at only £367 – some £163 a month less than the average rent earned.

Other locations around Britain where buying is by far the better choice at current asking prices include Birmingham, Derby, Cambridge, Milton Keynes, Nottingham, York, Peterborough and Norwich. Many of these are also university towns with a regular supply of student tenants – although some also have an oversupply of new build flats on which it is difficult to get a mortgage.  

Low rent areas 

‘Conventional wisdom, that buying is better than renting in the property market, holds true for most places around the country,’ explains Nicholas Leeming, commercial director of Zoopla. ‘However, there are places where renting is the better option which may be driven by an excess of buy-to-let flats or a shortage of properties for sale.’ 

Landlords should avoid buying in areas where renting is a better option than buying. Topping this list (which students should study before deciding on which university to attend) is Huddersfield, where the average two-bed flat costs only £493 per month to rent but £146,898 to buy. Renting is also cheaper than buying in a number of other places including Oldham, Brighton, Swansea, Bournemouth, Bristol, Cardiff, Plymouth, Stockport and Edinburgh – most of them university towns.

But a word of warning for would-be investors. It might be wise to opt for a fixed rate loan. If interest rates were to increase by 1% and rents to remain the same, the tables would be turned and renting would become more cost-effective in 80% of the locations studied. 

Negative factors

It would also be foolish to ignore the negative factors which have yet to show up in the statistics. Rising unemployment will take its toll of landlords who will suffer arrears and there is bound to be downward pressure from the Budget cap on housing benefit.

Housing benefit claimants are a significant force in the rental market. There are 4.72 million claimants and one million of those receive local housing allowance, the benefit for tenants in the private rental sector. In his Budget, the chancellor imposed caps on housing benefit of £400 a week for a four-bedroom property and £250 a week for a two- bedroom home.

Landlord Expert
By Landlord Expert July 22, 2010 15:12

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