Market News

(Bloomberg) -- Buying a home in Britain is once again likely to be cheaper than renting over the next five years, according to an analysis by Capital Economics that reversed the position of a year ago.

The findings by the London-based consultant reflect a surge in rents and drop in mortgage rates, which have shifted the calculus in the property market back in favor of buyers. 

Renting was cheaper for the first time in 14 years in 2023, when a sharp series of interest-rate hikes from the Bank of England pushed up borrowing costs to the highest since 2008. Now, investors expect the central bank to ease off on its monetary tightening, and that already has translated to cheaper mortgage rates.

“Looking ahead, rising rents and falling mortgage rates will reduce the difference between upfront costs of buying and renting,” Imogen Pattison and Andrew Wishart from Capital Economics wrote in a note to clients. They expect “mortgage demand will continue to recover this year while tenant demand softens.”

While UK house prices slid by 1.8% last year, according to Nationwide Building Society, they’re still 20% higher than they were at the end of 2019 and have become a real strain on affordability. But wages also are growing rapidly, and that has put the market on track for its longest stretch of improving affordability in more than two decades.

The figures from Capital Economics also reflect quickly rising rental costs, which hit record last year as more landlords sold off properties, leaving a mismatch between the supply of places on the market and tenant demand. Tighter tax rules along with rising interest rates made renting out properties less profitable for many landlords.

Capital Economics’ research takes into account the initial capital cost of buying a against renting along with expected capital gains, transaction costs and payments over a five-year period. It assumes buyers take a five-year fixed-rate loan for an average first-time buyer property. It looked at the five years starting in July 2018 and then again the subsequent period starting in 2023.

The conclusions chime with other surveys indicating an upheaval in the property market. The estate agent Savills said rental prices in prime central London and commuter-belt suburbs slipped in the fourth quarter due in part to affordability constraints.

“Prime London rental values are starting to stall as the imbalance between supply and demand unwinds,” said Jessica Tomlinson, research analyst at Savills. “Affordability is also playing a role in keeping growth more steady.”

In London, SpareRoom, which matches homeowners with people looking for rooms to rent, saw costs fall for two consecutive months for the first time since February 2021.

“Tenants are struggling and landlords are leaving the residential market in alarming numbers,” SpareRoom said in a post on its website. 

Capital Economics said that until 2021, renting was only cheaper from 1998-1991 and then again from 2003 to 2009. Both periods were followed by a big drop in house prices.