Friday 20 September 2019

Expensive London homes still cost less than paying the rent

To buy or not to buy: It costs less to pay a mortgage than rent in all but eight of London’s 33 boroughs, according to research by Cluttons LLP
To buy or not to buy: It costs less to pay a mortgage than rent in all but eight of London’s 33 boroughs, according to research by Cluttons LLP

Sharon Smyth

While high prices helped bring London's home-selling boom to an end, getting a budget-stretching mortgage still turns out to be cheaper than renting in most of the city.

A shortage of properties for lease is pushing up rental rates at a faster pace than wages. It currently costs less to pay a monthly mortgage than rent in all but eight of London's 33 boroughs, according to research compiled by Cluttons LLP.

Sales volumes in London are falling and rents are rising as people hold off purchases in the belief that prices will fall.

Home-price declines have spread to more areas this year, hitting hardest in expensive riverside districts like Wandsworth, Tower Hamlets and Westminster. Residents in Barking and Dagenham, where homes are cheapest compared with income, would save Stg£368 a month as owners rather than renters, the data shows. The difference was the greatest in Camden at Stg£984.

While purchasing a home may generate monthly savings, the stumbling block is stumping up a deposit, commonly 25pc to 30pc of the price. That's harder for buyers in London, where prices are 74.5pc higher than the UK as a whole, according to Homelet.

"London's lack of supply of accommodation means you need to be a double-income family, have help from the bank of mum and dad or be part of a flat share to afford to rent while at the same time saving for a deposit to buy," said Faisal Durrani, head of research at Cluttons. "It's pretty tough in general but much easier to do in the outer boroughs than in central London."

The most affordable rents relative to incomes are found in the boroughs of Croydon and Bexley, where residents hand over 51pc and 52pc of their monthly salaries to landlords.

The most expensive lettings relative to incomes are found in Kensington and Chelsea and Westminster, the data showed.

Outside of London, anyone fearing a Brexit-induced house-market crash in the UK would do well to remember one simple fact: the country isn't even close to keeping up with demand for new homes.

While a sharp drop in their shares last Thursday showed that homebuilders aren't immune to uncertainty over Britain's economic future, figures released the same day may be more important. They show that construction continues to lag behind the UK government's targets, suggesting that a failure to meet demand will buoy the market for some time to come.

Last Friday, UK homebuilders extended their declines after three of the biggest companies in the industry - Persimmon Plc, Taylor Wimpey Plc and Barrett Developments Plc - all fell by more than 7pc the previous day. The shares are still trading above the lows reached in 2016.

"We can't ignore there are some headwinds caused by the uncertainty surrounding Brexit," said Grainne Gilmore, head of residential research at broker Knight Frank LLP.

However, "the mismatch between supply and demand in many parts of the country - particularly in urban areas - will continue to be one of the factors underpinning home prices in the UK," she said.

Limited access to land, increasing construction costs and a slow planning process mean that homebuilders have failed to deliver enough properties for at least a decade. To address the problem, the government last year announced an annual target of 300,000 homes. Yet neither developers nor organisations such as the Royal Institution of Chartered Surveyors (RICS) believe that's achievable.

So far, they've been proved right. Last Thursday, the Housing Ministry reported annual delivery of 222,190 net additions to the nation's stock of homes during the 12 months through April.

That's only a slight improvement on the previous year.

The problem is especially acute in London, where net additions fell about 20pc from a year ago to 31,723 units, less than half the 65,000 units pledged by Mayor Sadiq Khan in his effort to convince voters he could solve the city's chronic housing shortage.

Home prices in the UK capital have risen by almost two thirds over the past decade, according to data from the Office for National Statistics (ONS). The average rent, meanwhile, stands at Stg£1,619, compared with an average of Stg£768 in the rest of the country.

But while some commentators are foccussing on the imbalance between supply and demand, other stakeholders have expressed concern that the uncertainty of Brexit is eroding confidence in the residential property market.

Last Friday's Scotsman newspaper carried a report in which leading UK housebuilder, Bovis Homes, cautioned that Brexit uncertainty had taken its toll on discretionary homebuyers. The warning came after Taylor Wimpey had said it was seeing signs of customer caution, particularly in the southeast of England. Bovis' sales rate per outlet a week for the year to date has held steady at 0.51, with pricing in line with expectations. The firm also welcomed the extension of the Help-to Buy-scheme to March 2023.

However, it told investors that "the uncertainty surrounding Brexit has impacted discretionary buyers".

George Salmon, equity analyst at Hargreaves Lansdown, said: "Bovis typifies how the UK housebuilders are dividing opinion in the markets.

"The housing market is already slowing, and the worry is it grinds to a halt in the event of a disorderly Brexit. A weak secondary market means some 15pc of Bovis' transactions now rely on part-exchange - hardly reassuring."

(Bloomberg)

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