There’s no disputing the fact that it’s becoming far harder to move up the property ladder as quickly as it used to be, especially in the capital. Transitioning from the rental market to owning your own home can be a huge struggle as prospective first-time buyers’ savings are squeezed by landlords. The increase in rent prices by almost 10% during the past five years at a level that’s similar to earnings, combined with house prices rising by around a third have made saving for a deposit an uphill struggle for many.
The situation had been promising for homeowners. Persistent low-interest rates over the past five years combined with a drop of 6% on mortgage interest payments across the country, meant a positive outlook for existing owners and a glimmer of hope for those about to get on the market. Homeowners, as a result, have experienced a growth in earnings rate that’s 18% greater than mortgage repayment costs, providing an opportune windfall.
However, a change is on the horizon that could spell a rough patch for homeowners and create a slightly more level playing field for renters.
The OBR is forecasting an increase of 36% for mortgage interest payments as interest rates look set to revitalise over the next few years. Earnings are estimated to increase by only 14%, making it likely that homeowners will feel a pressure on their finances that was not felt over the previous years and a much-reduced windfall. Owners will be wary of being more careful with spending to accommodate the huge hike in repayment fees.
The yo-yo will thus slightly swing towards renters because of this cloud for homeowners, rents are set to rise but only at a rate of 12%, less than earnings. While this is not total relief for those caught in the rental cycle, any signs of improvement or at least feelings of being a bit less worse off than homeowners for a change, are encouraging. Potential first-time buyers will however still face a challenge to secure a purchase. While savings ability may increase, deposits still linger in the distance as property prices are on track to increase by a further 14%.
For those looking to buy in the capital, London is currently the weakest area for house price growth in the UK, suffering a 1% decrease in the first quarter of 2018, but still remains the most unaffordable city to live. Outside of London property prices are showing growth, however, the impending increases on mortgage repayments may again slow market activity.
Ultimately the choice of whether you should buy or rent comes down to motivations and financial capabilities. The prices of renting and buying are about the same, dependant on areas of course. The economic benefit of renting is that you have flexibility in moving easily and don’t have the financial worry of house prices going down had you previously become a homeowner and were then thinking of selling. However, the downside, of course, is that you’re paying directly into someone else’s pocket rather than investing in a property that you will ultimately own. However with house prices rising at a faster rate than earnings, and with the prospect of high mortgage interest repayments looming, buying a property could become a far less common affair.
It is evident that the effects of Brexit are now permeating through the property market and both renters and homeowners alike are facing economic challenges. For the time being, there’s no immediate option in the ‘do I buy or rent’ dilemma that’s completely better than the other and is without some downsides.
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