Thursday, 26 January 2017

Renting good: home-ownership bad? More evidence says yup!


Regular readers of The Penicuik Property Blog will have heard me bang on (and on and on I am sure some of you are thinking!) about the UK’s obsession with home-ownership being a thing of the past and how far more people are renting by choice these days.

I appreciate that at times this view could be questioned particularly when you see the number of TV programmes, social media posting, magazines etc about the wonders of home-ownership but these people have to sell their shows/writings somehow!  I remain a strong believer that the market is moving more towards renting rather than home-ownership and some new research out suggests that I have a point.

This new research shows that the financial benefits of renting rather than owning have been under-rated.   A financial researcher at the University of Stirling, Dr Isaac Tabner, notes that the cost of renting includes many additional expenses incurred by home-owners, such as building insurance and property maintenance.

He says a simple comparison between rent and mortgage costs overlooks these additional hidden costs and can lead to an overestimate of the financial benefits of owning rather than renting.

The new research, published in the International Review of Financial Analysis, provides a detailed explanation of how costs of renting versus buying a home can be compared, while taking tenants’ and owners’ own personal circumstances and macro-economic conditions into account.

In reviewing transaction costs, rental yields, opportunity costs, inflation and the length of time owning a home, the study also shows that – during periods of deflation or zero inflation – people who rent are typically better-off financially than those who own their home.
Even when economic conditions are favourable, households may need to own their home for between five and 10 years before returns from the rent they are no longer paying are sufficient to compensate for the high transaction costs of buying.  However, increases in inflation and rent can tip the balance in favour of ownership.

“It is often thought that buying a house makes more financial sense in the long run.   However, renting is frequently more worthwhile than buying for financially-constrained households, as well as households likely to relocate within 10 years” explains Tabner.

“As well as a reduced ability to recover transaction costs, households relocating within a few years face a higher risk that medium-term prices will move against them, thus reducing or eliminating their equity, while financially-constrained households face much higher mortgage costs” he adds.

The study shows that, for someone purchasing a home with no mortgage, deflation of just one per cent per year can result in an equivalent loss of half the present purchase value of their home if they hold it for 45 years.   By contrast, inflation – including wages – of two per cent per year, results in the same individual gaining 50 per cent of the present purchase value of their home if held for around 28 years.

You can see the research here.

If you are looking to invest in buy-to-let or need assistance letting a property please give me a call on 01968 674601 and I’ll be happy to offer you my time and experience of buying and letting in and around Penicuik’s property market.

Thursday, 12 January 2017

What does 2017 have in store for Penicuik's landlords?

2016 was a tough one for many landlords as they were dealt a bloody nose by the government from an array of additional legislation and financial penalties in the form of stamp duty and tax reforms.

Nevertheless, those in it for the long term saw an increase in their capital of some 1.7% here in Penicuik in 2016. That’s based on an increase of £2,920 over the year, from an average price of £176,907 in January to £179,827.

This increase compared to the national growth in house prices of 3.5% (the average house price in the Scotland now stands at £183,058) and an increase of 1.9% during 2016 in Midlothian.

This seemingly unstoppable rise in house prices would explain why rental demand continues to be so strong in Penicuik, as first time buyers see their homeownership dream creep ever further away.

Delving deeper into the figures though, it seems to me that a lot of this increase in price has come about from a lack of supply, rather than a huge rise in demand. This is illustrated as properties are remaining on the market for a significantly shorter period than they were a year ago (161 days in December 2016 vs 214 days in December 2015).

Nationally this pattern has been reported too as the number of sales decline whilst both homeowners and tenants are remaining in the same property for longer.

This is good news for landlords as there will be less ‘churn’ of tenants - something I regularly talk about in regards to the properties I recommend people aim to invest in.

And whilst the tax changes to mortgage interest relief will start to impact landlords, at least solace can be taken by the record low interest rates that mean buy-to-let mortgages are available for significantly less than the yields on offer from rental property and, importantly, the returns on the right buy-to-let properties are significantly higher than when you put your cash in the bank or invest it in the stock market.

A year ago the consensus was that interest rates would rise (something I wrote I didn’t expect to happen) and yet interest rates dropped in 2016! There’s little sign now that interest rates are likely to be increased and the boat rocked in light of the unexpected Brexit vote and Donald Trump’s ascension to Presidency.

Unfortunately the two events mentioned above (Trump & Brexit) has caused widespread uncertainty, which invariably trickles down into our local property market. This makes it even more important that you invest in the right property at the right price and that it is managed effectively to maximise your return and limit your risk.

If you are looking to invest in buy-to-let or need assistance letting a property please give me a call on 01968 674601 and I’ll be happy to offer you my time and experience of buying and letting in and around Penicuik’s property market.