Beat the crunch: Why it can pay to rent

With house prices falling, many potential buyers are choosing to step off the property ladder. It's bad news for sellers, but the rental market's booming. Phil Thornton reports
Click to follow
The Independent Online

House prices are falling, oil prices are soaring, the country has an unelected Labour prime minister and private renting has never been so popular. That might sound like 1975 but it actually describes Britain in 2008. According to Halifax bank, one in eight – or 12 per cent – of households rents privately, the highest share since Rising Damp, the classic sitcom about renting, was topping the TV ratings.

The idea of paying rent – often seen as money down the drain – had seemed ludicrous when one could use the same money to pay mortgage interest on a property whose value could only go up. And to be fair, from 1995 through to earlier this year that was true – prices trebled over that period. Renting became the domain of students, divorcees and the hard-up – the mainstays of Rising Damp.

But since the first weeks of this year when house prices started to fall, for many people the idea of renting has become a more attractive and rational option than risking buying a home just as the property market turns.

Predictions of house price falls of between 10 and 15 per cent have changed people's behaviour, says Jonathan Haward, managing director of The County Homesearch Company. "If you have seen a house for £1m that could soon be worth £900,000 or £850,000 if you buy it now – why do it?" he says. With banks offering almost 7 per cent deposit interest, that same £1m could yield £70,000 a year, easily covering rent payments. "A weakening sales market will always boost demand in the rental market, which is great news for landlords, who are in the enviable position of being able to cherry-pick prospective tenants and demand the full asking price – if not more," adds Haward.

According to home move service, the proportion of people moving out of a rented property and buying a home has fallen by almost a half in the first quarter of 2008. "Potential first-time buyers who previously would have been the largest group moving from renting to buying, are now delaying a purchase as an uncertain market and tougher lending criteria is making it harder for this group to step on to the property ladder," says Keith McNeilly, one of its founders.

Paragon, the leading buy-to-let mortgage lender, says this shift to renting is a long-term trend and is increasingly providing homes for people in their thirties and forties with families. "The lack of mortgage availability for first-time buyers, as well as a fall in confidence in the housing market has caused more people to stay in private rented homes for longer," says John Heron, Paragon's managing director. "If the situation doesn't improve for first-time buyers, we will soon arrive at levels of demand for private rented homes that we previously wouldn't have expected to see for many years."

Annual rents have risen almost 14 per cent over the last year to stand at £12,048 in April, having broken the £1,000-a-month barrier in March, according to Paragon. The rental market is even starting to take on some of the bad habits familiar to homebuyers. "Tenants who don't arrive prepared with a deposit at the viewing are finding themselves gazumped within minutes of making an offer," says Katy Waite, Surrey director of County Homesearch. "Landlords have people queuing up to rent their properties, ready to pay full deposits on the spot and the full rental price without question. If a client does not move quickly they face losing out."

Figures from the Association of Residential Letting Agents this month showed the proportion of agents reporting demand from tenants outstripping supply of properties was at a record high of 39 per cent.

Agents around the country are reporting a boom in rentals. "The bottom end of the market is flying – rents up, applicants up," Andrew Jourdain at Chancellors estate agency in Richmond, south-west London, told the latest survey by the Royal Institution of Chartered Surveyors. "One-bedroom flats are in high demand."

At the other end of the country, Paul Milling at Dacre, Son and Hartley of Ilkley in the Yorkshire Dales, said: "There is high demand for the larger family property from people who have sold and are choosing to rent rather than buy straightaway."

John Socha, vice-chairman of the National Landlords Association, said renting has become respectable. "It is the way the world has changed," he says. "The job for life no longer exists so people move for work more. Selling and buying a house each time is hard work whereas renting provides fluidity."

He says the huge surge in university student numbers has changed the market. "More people are going to university and they come from nice middle-class homes and expect carpeting, central heating and broadband access," he says. "They see renting as normal."

All this should make it a good time to become a landlord. That may be true for professional investors, says Martin Ellis, chief economist at Halifax, but not for a small-time landlord.

"The economics for the smaller investor no longer add up given that people no longer have a guaranteed capital gain to look forward, credit is being rationed and interest rates have risen."

This may in turn lead to a lack of supply of new homes for rent that will push up prices further. There seems to be little relief in sight.

"I would see this persisting because I don't think the uncertainty will disappear over the second half of the year," Ellis says. "People will be looking to rent as long as there's nervousness about owner-occupation."

Phil Thornton is lead consultant at research house Clarity Economics

How to survive the rental market

With people looking to rent now facing the same trauma of gazumping that homebuyers have done in recent years, potential tenants need to be prepared.

The County Homesearch Company offers some tips:

*Register your interest early on so you can keep track of the types of rental properties coming onto the market.

*To avoid disappointment, view the property as soon as you can.

*Assure the landlord or agent that you are keen to take it on if it matches up with your specifications.

*Be prepared to make an early decision.

*Have your deposit ready and even a pen to hand to sign the contract straightaway.

*Be prepared to compromise – with a competitive lettings market landlords are able to increase their rent, so you should be realistic about what you can afford in today's market.


Andre Douglas, 31, a scientific officer at a local council, Cambridge

Andre saw the potential for the current downturn in the housing market when he was house-hunting in Cambridge with his fiancée two years ago.

"We were putting in offers at the asking price and being knocked back," he recalls. "We got pretty disillusioned as it was clear there was a lot of big money from buy-to-let and cash buyers who were active."

He now pays £800 a month for a three-bedroom semi-detached house with a garden in the university town. He would have been looking at monthly repayments of between £1,000 and £1,300 to secure a property two years ago.

Now the surge in mortgage rates in the wake of the credit crunch has made buying even less of an option. "We are glad to be on the sidelines," says Douglas.

Fortunately, his landlord has indicated he is happy to continue to rent out the house. Douglas is using the opportunity to pay off other debts and allow the deposit to earn current high levels of interest while he monitors the property market.

"It is a question of wait and see," he says. "Will it be like 2005 [when prices dipped and rebounded] or a crash like 1990 and 1991? The news is changing week by week but nothing is happening that is making me say 'let's bring forward the day of buying'."

James Acreman, 28, marketing executive, London

When James moved to London after 18 months' travelling to take up a job as a marketing executive, it didn't even occur to him to buy.

"I have got a good, well-paid job but to get the quality of accommodation that I would like and to be able to afford somewhere to buy in zone two [for the Tube] was not possible," he says.

"I really did not see buying as an option because I had just got back from travelling. I did not have a deposit saved up and I was not interested in a 100 per cent mortgage, so renting was my only option."

He pays £550 a month excluding bills in a house that he shares with three other people in Brixton. Even a one-bedroom ex-council flat would cost around £180,000, which would cost him £875 a month for a 100 per cent interest-only mortgage.

But it was more than just the money. "I like the flexibility of renting and not being tied down by a mortgage," he says. "I have friends in Southampton where I am from and they have got mortgages and I say 'Why not join me in London or go travelling?' and they say 'I would but I've to pay the mortgage'."

He describes his house as a good quality property with a garden, a decent fitted kitchen, wooden flooring throughout and broadband access. "It is not as good as a family home but I have been through the university accommodation slums. Compared with that it is fantastic," he says.

Given the level of mortgage rates and the possibility of further house prices falls he does not expect to get into the property market. "I'm happy to carry on renting for the foreseeable future."