The issue of housing costs and the possible impact of rising interest rates and mortgage regulation is our primary focus this quarter. Our analysis reveals some interesting, and perhaps, worrying facts that have far-reaching implications for politicians and policymakers.

The most striking for me was that renting households pay more (£9,567 p.a.) than households with repayment mortgages (£8,403 per annum). Even social housing tenants are paying more than the average interest-only element of mortgage payments.

Although we expect the bill for mortgaged owner occupiers to rise by about 28% (to £10,762) over the next five years, there is still a big discrepancy between what someone able to access a mortgage is getting for their money versus the ‘dead costs’ of renting.

For the mortgaged household, a proportion of monthly payments is effectively ‘enforced saving’, stored as equity in their property. Equity is still accumulated in a home regardless of what happens to house prices and saves further outgoing in the form of rising rents. In recent decades, house price growth has also ‘geared’ mortgagors’ savings substantially.

So mortgaged owner occupation helps to turn ‘equity poor’ households into ‘equity rich’ ones over their lifetime. If, by pension age, ownership is mortgage-free, the saving on rent over the average 20-year duration of retirement is worth £191,340 to the average UK household.

Renters have no such access to 
a very cost-effective and convenient form of saving. Accumulating equity becomes harder for them as they have to make additional payments over and above annual rent costs. (Low savings rates also compound this difficulty).

It has perhaps been overlooked 
by the Bank of England and other policy makers that the repayment mortgage has therefore been a very effective form of saving in the UK over past years.

Closing the equity gap

Not accounted for in official savings data, high levels of mortgage repayments help to account for why the measured savings ratio is relatively low and fell significantly in the UK over the period that owner occupation grew.

It is a singular feature of the post-credit crunch environment that this ability to accumulate equity has been impaired for younger generations.

We have been very much in favour 
of the expansion of the private rented sector since the 1980s. However, renting has now become less a tenure of choice and convenience (as it should be) to one of necessity, as more people on adequate incomes, but without access to a deposit, have been prevented from becoming owner occupiers. This has the potential to create both social and economic problems which need to be addressed.

Right now regulators are seeking to curb owner occupation levels rather than expand them. Maybe, with longer longevity, the arguments for 30 year mortgages at higher multiples should be more compelling if the equity gap in housing is to be closed.

Taken from
Residential Property Focus Q3 2014