The Era of Age Rent

The Era of Age Rent

More and more, we are seeing an increase in the size of the private rented sector. And with this comes more negative press about rogue landlords, high rents, and how this is all a disaster for the UK housing market.

However, should this be the case? Other countries – like France and Germany – are perfectly happy with renting. So, where does our obsession with homeownership come from, and is it time to reconsider and welcome the era of age rent?

First off, why the obsession to own your own home? I asked a friend who is saving for his first property why he wanted to own his own home. After the look of bewilderment had left his face, he answered, “Because I don’t want to be paying my landlord’s mortgage. I want a place of my own, something I can pass on and which gives me a secure retirement.” So, really, it largely comes down to money and to the British capitalist culture where a property is not so much a place to live, but rather a commodity – an investment and a fundamental part of your pension. And this is often where you see the divergence between the UK and our European counterparts. Agnès Poirier of the Guardian views the UK approach as pure speculation; borrowing large sums simply for a roof over your head.  

Renting is often demonised in the media. Some recent headlines demonstrate the magnitude of this. For example, on the renting section of the BBC News website, a headline proclaims, “UK housing is broken, can anyone fix it?”. Similarly, in The Telegraph, we read, “How Labour plans to attack buy-to-let investors”, and in the Guardian, “The real faultline in this election: landlords v tenants”.

So, what is the problem? And can we look towards a future of age rent, where there is no stigma attached to renting a property and your retirement is not judged by the extent of your downsizing?

Well here is your first bombshell: your home is not often an asset. So often people believe that you must get onto the property ladder because that is your pension and your greatest asset. Well, let me give you two things to mull over. Firstly, the definition of an asset is “something valuable belonging to a person or organisation that can be used for the payment of debts”. secondly, the word mortgage, which translates directly from the French as “death pledge”. With 370,000 first-time buyers getting on the housing ladder with a mortgage in 2018, that’s a lot of people with high, long-term debt. And this added to the massive £1.451tn total UK mortgage debt in Q1 2019.

So why is your main home not an asset? Well, simply, because it doesn’t pay you anything and yet costs you money to maintain it. To a large extent, it can be perceived as a liability. But what about the appreciation in value, I hear you say? Well, money is only really useful if you can use it. I am afraid you can’t spend bricks and mortar. You may think that you can sell it and buy a better house, but house prices are generally proportional. So, unless you are lucky, a particularly shrewd investor, or looking to downgrade in another area to get that bigger property, you probably won’t upgrade from that appreciation.

And then we come to the death pledge. Let’s do the maths: on a 3% mortgage, over 25 years for a £250k mortgage, you will pay £105,597 in interest. If you were to invest that money elsewhere, you would get a much greater return – but more on that later. This isn’t intended to be an overly negative view on homeownership; in fact quite the opposite. Owning a home can be a fantastic way to ensure some security throughout life and to have a place of your own. It’s just that it’s not the only way.

As I mentioned above, you pay a lot of money against a mortgage, which you don’t see any value for. In fact, on that same £250k mortgage, you will be paying £625 a month in interest (3%) to the bank in the first instance. You would still have to pay the equivalent capital in rent which would be an average of £833 a month (with the stress on “average” as capital, in this case, would start at roughly £560 for the first month, but be £1,182.57 in the 30th month). Two-hundred and fifty thousand pounds will buy you a two-bedroom flat in Romford, a four-bedroom detached house in Alnwick, Northumberland, or for a little more – £275k – a studio flat in Maida Vale, which would include your 10% deposit. In all instances, your £833 a month would get you a rental for the equivalent property in each of those areas.

So yes, you pay £833 a month to a landlord but you get to keep your £625 in interest. If you invested that money at the same level of interest, you would have a closing balance after 25 years of £300,601.97 and monthly interest payments to you of £730 (which you would need to re-invest though to get your balance). To put this into context, Property Partner indicates an 11% return on a balanced plan, and even on a Hargreaves and Lansdown balanced income fund, which is a very low-risk investment, you will likely receive 3.73%. These investments would equate to an income of £1,148,592.13 and £335,417.26 respectively. Of course, with any investment, you may not gain as much as you hope. But if you are going to class your main home as an asset, then homeowners are in the same boat. And if we started talking about negative equity – when the value of real estate property falls below the outstanding balance on the mortgage – then homeowners can be in even more trouble.

Of course, a lot of the above is based on assumptions and is a little simplistic. For example, interest rates could go up, interest payments go down as you pay off capital and rent can and will go up over that time – but then again, so should income. But you get the idea. So long as you are comfortable paying the capital to your landlord, then this is a viable way to save the equivalent for your pension – and perhaps a lot more. Not to mention, you can start investing at the same time that others start saving for a deposit. And that can get you ahead on average by eight years – and 10 years in London.

Another win for the renters and a loss for the homeowners is that property is an illiquid possession. In layman’s terms, this means that it can take months to sell. In London, 49% of properties take more than two months to sell. And even when you do finally sell, you may not get what you had hoped, especially at the higher end of the market. I have heard many times of properties staying on the market for more than three months, after having values slashed by 5, 10 even 25%. This really does not bode well when you are banking your pension. On the other hand, renters enjoy fixed-term leases where the duration can be negotiated, and four weeks’ notice given to move home. Unlike the emotional attachment that is often felt by homeowners, renters are free to pick new locations and new experiences that cater to their needs at the end of any given lease period.

One thing that can’t be taken away from homeowners though is the security of tenure. Whilst flexibility is great, no-fault evictions are real – and rising. And whilst a ban is promised, it can still give renters, and in particular, renting families, serious anxiety as their fixed term comes to an end.

This does bring us back to the first question: why the Europeans are so happy to rent, and we are not. Maybe it’s because the stricter laws governing rent restrictions and eviction controls in France and Germany give them security. Harking back to “an Englishman’s home is his castle”, maybe it has a lot to do with the fact that an owned home cannot be taken away, whereas, with the UK renting system, it can.

The notion of ‘generation rent’, I believe, comes down to several things. Principally among them are security and money. Both are crucial to a person’s sense of wellbeing, and in fairness, one without the other is pointless. While currently, it is possible to ensure financial freedom without owning your own home, it is questionable at this point in time that the same person could attain the level of security they would need for themselves or their family. So, to round off, perhaps the biggest obstacle to the reality of generation rent lies not in your pocket, but in Westminster.

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