Can Renting Beat Buying?

A 2017 report by leading UK property website Zoopla has revealed that, for over half the cities and towns in Britain, it’s now cheaper to rent accommodation than it is to buy a house. CNBC ran a similar study in the US earlier this year, as did CoreLogic in Australia.

Across all these nations, and many others besides, findings in recent years have shown that the ratio of property prices to average income has been steadily rising for some locations, while falling quickly in others.

The result, ultimately, is that an increasing number of citizens in many of the world’s leading economies are finding themselves better off staying in rental markets than investing in property long-term.

A smart investment…sometimes

Perhaps the most frequently cited downside of renting, of course, is that it basically amounts to ‘throwing away money’ month after month. In many ways, however, that simply doesn’t hold up as an argument any more.

At the end of the day, you need a place to live, and that’s always going to involve a significant financial outlay regardless of precisely where it’s going. While renting, of course, you’re not building up equity – but, crucially, that’s also true for much of the cash you’ll plough into ownership these days.

Interest on mortgage repayments can eat up a huge chunk of the money you put in, especially during the early years of a plan. It can often take more than a decade of repayments before you begin making a dent in the principal loan itself, rather than the interest on it. Most rental tenancies don’t last nearly this long, and for many people, the flexibility this offers is well worth the sacrifice of full ownership.

Furthermore, according to a 2015 cost-vs-value report by US-based Remodeling magazine, expensive renovations and home improvements won’t necessarily add value in the long-run: in fact, they claim, returns tend to average out at around 62 cents for every dollar spent.

But can renting ever truly beat property ownership in terms of convenience and long-term economy – and if not, what key benefits and drawbacks does it offer?

Pros of buying

• Buying a house is still broadly viewed as a relatively safe investment – homeowners will typically benefit from slow but reasonably steady capital growth, properties will often be worth more if and when they’re sold than they were bought for, and mortgage repayments can help contribute to long-term wealth accumulation through additional security and equity
• Being a homeowner also allows some people to generate a secondary source of income through renting out rooms or entire properties – some income-generation properties are even subject to certain tax deductions
• Buying a home transfers full legal ownership of a property, which allows the buyer much more freedom with regards to how they use it (subject to local authority approval) without requiring landlord permissions – its appearance and layout can be altered drastically, and this can often add significant value long-term
• Homeowners make a significant investment under their own names, which – along with regular timely payments over an extended period – can give considerable benefits in terms of overall credit scores
• Property can often be refinanced if the homeowner later needs to withdraw a large amount of money for other major investments

Cons of buying

• For many buyers, the biggest barrier to getting on the property ladder is often saving up enough for a deposit, and steadily rising house prices seem to compound this issue year on year
• Although investment in property is broadly seen as safe, the market does of course fluctuate (wildly at times, although this is rare): it’s entirely possible that a homeowner may want or need to sell to a specific deadline, but simply can’t make back their initial outlay at that time; this can have a dramatic knock-on effect in terms of ‘next step’ options, and even send people back down the so-called ladder
• Even if the market itself doesn’t fluctuate, being a homeowner doesn’t give you any control over the long-term desirability of the area you buy in; social shifts, employer closures, traffic issues and major building schemes can all have significant impact on property values in any given location
• As well as representing a serious long-term financial commitment, the upfront costs of investing in property – stamp duty, deposits, legal and conveyancing fees, and any initial renovations – tend to be major
• Mortgage repayment rates can fluctuate over time, especially for homeowners on a variable interest rate plan, or with a fixed rate period that expires at any point; this has no effect on the obligation to keep making payments consistently
• Other ongoing costs, including all maintenance and repairs, insurance (building and contents), land taxes, water rates and council fees are payable entirely by the live-in owner
• Homeowners often find it very difficult to sell up and move on quickly should they ever want or need to; enforced relocations with a deadline due to job changes, family expansion, or issues with the existing property or location can be incredibly stressful (and potentially expensive) affairs if a suitable buyer doesn’t emerge in time

Pros of renting

• Renting a property allows far more flexibility than owning a home, which is ideal in the event of sudden life changes like job relocations, a desire to move on and explore new areas, or to leave old ones behind should they become less desirable over time
• The landlord, not the tenant, is generally responsible for the costs of insuring and maintaining a home – typically, contents insurance is the only ongoing cost besides rent that a tenant will be required to pay
• Renting often enables tenants to move into highly desirable areas they might not be able to afford otherwise
• When a tenant does decide to move out, they have no responsibility for finding someone else to take up the existing property, which can be a lengthy and arduous process
• For retired tenants especially, renting can often be a highly attractive arrangement as it eliminates ongoing worries about meeting heavy financial burdens on a limited income or timescale, or leaving behind significant responsibilities for family members
• Tenants can, of course, still decide to buy property eventually – and many do, after using the rental markets to save towards a healthy deposit
• Renting enables diversification of investment, rather than sinking the bulk of your savings into a single asset, which is inherently more vulnerable
• For renters who can save money in the short- or medium-term, they may see far greater returns on other investments than they would’ve done had they used the money to buy a house
• The convenience of renting – and thus of not having responsibility for many household maintenance or repair jobs – means that many tenants enjoy more free time in the evenings and weekends, either for leisure pursuits or to explore other income opportunities

Cons of renting

• In many locations, monthly rents can often be higher than typical mortgage repayments for the same area
• There’s no getting away from the fact that renting basically amounts to paying someone else’s mortgage for them
• Renters have no guarantee that their lease will be renewed when the current one expires, meaning that it’s common to have to move without wanting to
• Lease agreements are often quite constrictive, and must be abided by in full, so tenants will almost always have to request permission to make any changes to the property – as well as making it difficult to express any creativity with a house, this can also make it take longer (or indeed prove impossible) for renters to improve the standard of household fixtures and facilities
• Rental markets in many areas are inherently more limited availability-wise; it’s often tricky to find vacant properties that suit all of an individual tenant’s needs in the area they want to move into
• Tenants have no control over annual rent fluctuations, particularly where increases driven by inflation are concerned
• Tenants must be careful to take a complete inventory of the property and its condition when they move in; liability disputes over perceived damage or costs incurred by the landlord at the end of a tenancy are a common headache for both parties
• For anyone looking to rent as a group, it’s important to know the differences between joint and sole tenancy rental agreements, and the responsibilities for whoever’s left behind if someone decides to move out
• Renters don’t benefit from the ‘enforced savings’ effect of property ownership – without the obligation to make repayments on a mortgage every month, it’s all too easy to spend spare cash rather than investing it more wisely

So, which option is ‘better’? Predictably enough, the only fair answer is neither: the right call for you is going to depend entirely on your individual situation, both now and in terms of your future hopes and plans.

Only one thing is certain: these days, it all needs careful consideration before making any major commitments, which is clearly another reason why more and more people are seemingly being drawn into rental markets for short- and medium-term arrangements.

Home ownership remains an immensely rewarding solution for a great many people, offering increased security and a lasting sense of wellbeing (provided it goes reasonably smoothly, of course, which is by no means guaranteed). Moreover, full ownership is still the long-term aim of a vast number of rental tenants – and, for most people in that boat, it’s wise to use the time spent renting to build savings towards an eventual property investment, ideally with the help of an accredited scheme.

Regardless of where you live now, or where you’d like to live in future, check out what your local or national government is doing to help buyers or protect tenants, and take full advantage of any benefits it may offer in terms of achieving the best lifestyle fit for you.