Over the last two years, the housing market has been less than predictable. Despite the doom and gloom foreseen at the start of the pandemic, property prices have been rising dramatically and recently continued to outpace expectations. Savills’ UK Housing Market Update from earlier this month reports a 12.1% annual house price growth, this combined with unmatched income growth is leading to a squeeze on affordability for buying homes.
Whilst demand continues to exceed supply in houses, which has led to the continued growth of house prices to date, the question is for how long. The continued upward trajectory of house prices, increasing inflationary pressures, rising interest rates and banks increasing their checks on borrowers combined with the cost of living crisis are all putting pressure on the affordability of home ownership.
That trend has pushed home ownership further away or out of reach for many. While as a nation we continue to aspire to home ownership, for those seeking to live in a great location - but not yet able to buy, or choose not to – build-to-rent (BTR) schemes are increasingly offering not only high-quality accommodation with professional management, but access to locations and a lifestyle that may be unaffordable through buying.
The maths has historically been skewed in favour of buying. For years mortgages have been cheaper than renting and seen by many as an investment pot. However, analysis from Capital Economics demonstrates that the Bank of England’s back-to-back interest rate increases - with more predicted in the coming months - have now changed the calculus. Recent estimates point to monthly mortgage repayments growing by an average of £130 per month (reaching £1,000pm) with average rents at £980 even with strong growth. Thus, for the first time in nearly two decades, rents are cheaper than mortgages – and despite strong rental growth - the gap will continue widening.
What is more, buying a property goes well beyond the monthly mortgage payments. First, there is the need for a hefty deposit. Based on current house prices the average deposit stands at more than £61,100 and would take first-time buyers eight years to save up according to Barclays. On top of this, there are solicitors’ fees, stamp duty charges, house insurance, and the ongoing responsibility and financial commitment of repairs and maintenance.
The huge upfront investment to buy is part of the reason behind the growing popularity of build-to-rent and why its prospects in the UK are looking stronger by the day. BTR is not only a viable alternative to the traditional mortgage approach, but also a new model that can provide residents with access to a better home and lifestyle. The increasing desire for mobility for work has also led more people to choose to rent than locking into one location through buying their home.
BTR is superior to traditional renting through private landlords because it provides hospitality-style levels of service and flexibility in addition to high-quality, contemporary living spaces. Among its additional benefits are reliable and speedy maintenance covered by the landlord, professional management available 24/7, longer-term more secure and flexible tenancies, a range of deposit options, efficient homes with lower utility bills, high-speed internet connectivity, and pet-friendliness – thus considerably outperforming the private rented sector (PRS).
For those that have not followed the asset class closely of late, there is still the misconception that BTR is only for the select few and consists of luxury city-centre apartments and high rental premiums. This could not be further from reality. The latter is well portrayed by recent research from the British Property Federation and Dataloft which identifies the average resident in build-to-rent as earning £42,000 per annum. The study demonstrates clearly that BTR is as affordable as any privately rented property in the UK - with households in both asset classes spending just over 30% of their net annual income on rent.
While for many ‘owning is better than renting’ and renting has been seen in the past as “dead money”, it is undeniable that the landscape and attitude toward renting are shifting through need and choice.
In an environment where interest rates are on the rise, home ownership is not only harder to achieve but is no longer better for your pocket. BTR, on the other hand, offers an attractive alternative with greater flexibility and quality of life – making the ideal home and location more accessible to residents.
*James Mulcare is head of residential capital markets at Godwin Developments