The cost of capital repayments, that ballooned as house prices
rose in the 10 years to 2007, mean that on average it is 21% more expensive to buy than rent an average two-bedroom property (see Graph 1).

The cost of capital repayments have become an increasing burden on would be home owners.

Assuming a 25-year repayment term, the cost of capital repayments in the first year of a mortgage term account for an average 7.5% of earnings up from 4.2% in 2000. Putting this into perspective, today’s total cost of servicing a mortgage at 18.6% of the average salary is broadly in line with the average for the past 15 years, despite the current low interest rate environment.

Without capital repayment requirements buying is 11% cheaper
than renting, a position similar to that between 1993 and 2003
when buying was on average 21% cheaper than renting on an interest only mortgage.

The position is most acute for deposit starved prospective first time buyers illustrating the gap between generations.

Younger households, who are more exposed to the pressure on household incomes, are more likely to ’price in’ the equity, which they put into a house purchase, having regard to the income it could produce if it were invested elsewhere.

In contrast older generations are more able to take a view on their equity having benefited from historic house price growth.

Even in the first year of ownership the increase in personal
wealth from house price growth is usually sufficient to warrant
home ownership.

Over the past 25 years house price growth has meant that owning a two-bedroom property has added an average £3,500 to a buyer’s overall wealth in the first year of ownership. There has only been five years during this period, when this has not been the case.

This means the gap is widening between those, who are affected by the additional costs of ownership and those who can enjoy the increased equity that can come from it.

Taken from
Special Report: Renting vs Buying