The hidden cost of home ownership

Updated Wednesday 12th November 2008

Bricks and mortar - are they really the best place to stash your money? Or are there downsides to using your nest as your nest-egg?

[[TEMPLATE embed_media,podcast.open.ac.uk/open2media/money-programme/series10/podcast/home_ownership.mp3,,The hidden cost of home ownership,300,20,Copyrighted,The
Open University,,no,no]]

In the UK, home ownership is high, with successive governments encouraging home ownership for a number of reasons – the Conservatives because they think home owners are more likely to vote for them, Labour as a way of taking the cost of providing social housing off the government balance sheet. We are now a nation of home owners, relatively high in comparison with our European counterparts, especially Germany and France, but still not as high as in the US. Although, in Ireland, Norway and Spain home ownership is even higher. To let signs Copyrighted image Icon Copyright: David Fowler | Dreamstime.com Are you better off renting?

Home ownership statistics should be treated with caution – different countries measure them in different ways. For example, it depends what you mean by a “house”: using the US definition, four out of 10 homes in India would fail to qualify. Also, in a growing population, for the percentage of home owners to stay still, the number of house owners would have to radically increase. For example, in the US, the number of households increased by 10 million in the 1990s and yet the home ownership rate increased from 64% to 67% during that decade. In the UK, the big increase was between 1951 and 1981 – 28 percentage points – largely due to the sale of council houses at below market rates.

Buying a house at a discount to the market price is a ‘no brainer’. Similarly, in the US, mortgage interest payments are tax deductible, while rental payments are not, making buying relatively attractive compared to renting. Tax deductible interest on mortgages also encourages borrowing up the hilt – the more you borrow, the lower your tax bill.

In the UK, mortgage interest tax relief was abolished in 2000. But buying is still attractive for tax reasons – there is no capital gains tax on your main residence, however much you have made. When the capital gains tax rate was 40% on everything else, that looked attractive. And , in any case, you could take advantage of low taxation by setting yourself up as a ‘buy to let’ investor, with tax-deductible mortgage interest payments and a reduced capital gains tax rate of 24%. And all this was happening at a time when the mortgage market was deregulated, with traditional banks competing with building societies to offer attractive loan packages. They were able to offer so-called “fixed rate” mortgages – in practice for only 2 or 3 years, with borrowers expecting to be able to refinance at the end of this lock-in period with another attractive offer.

The rent versus buy decision is clearly partly a financial one. In a rising property market, it is easy to persuade yourself that if the mortgage costs the same as the rent, it is worth buying for the potential tax-free capital gain. And we all get sucked in. If we don’t buy, so the argument goes, we will lose our toehold on the property ladder. And that means only being able to afford a smaller house or flat in a less desirable area when we do – as we all expect to- eventually buy a property.

But we tend to forget that the property market is just that – a market in which prices go up and down and – worse – where liquidity can dry up much more easily than in a stock market. In a falling market, you may not be able to sell at all. My sister is trying to sell her house and has had the sum total of three visits from potential buyers in the past nine months.

The property market is a market in which prices go up and down...liquidity can dry up much more easily than in a stock market

In a rising market, we also tend to forget about the high costs of buying and selling. For example, renting a flat for £300 a week will cost around £15,000 a year on a flat worth say £350,000. But buying a flat for £300,000 will involve £10,500 of stamp duty, that is, the equivalent of 8 months’ rent. And that is before taking into account the legal fees, the estate agents’ fee on sale, the cost of the HIP, and the fees attached to any mortgage.

But there is a key non-financial reason why we don’t rent as much as say in Germany or France - security of tenure. In the UK, rental agreements are typically for 1 year with a possible break at 6 months, for both furnished or unfurnished homes. You’ve hardly had time to get settled in and you may be on the move again.

In France, furnished lets are similarly short term. But, the most common form of let, unfurnished, is for three years. The person who rents can give one month’s notice at any time; the landlord has to give six months’ notice at the end of the three years and only if there is a very good reason, such as they want to sell, or a close family member wants to move in. And, whatever the rental agreement you have, and whether or not you have paid your rent, you cannot be thrown out during the winter, between November and March.

I once asked a successful entrepreneur what was the best financial decision he had ever made. “Buying my house in Hampstead”, he replied. He had made more money in the property market than from his successful business. I think it is sad that we should in a sense be forced to buy houses and become experts in plumbing, electrics, and painting and decorating. I would far rather delegate that to the landlord, and get on with my work at which I am much more competent! The only problem with renting is the lack of a long-term rental contract to give me peace of mind. Maybe, instead of trying even harder than ever to encourage home ownership, the government could try to sort out the rental market instead.

Find out more

 

For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?

Other content you may like

Family or stock market ownership: What’s best for business? Copyrighted image Icon Copyright: Anton Sokolov | Dreamstime.com article icon

Money & Business 

Family or stock market ownership: What’s best for business?

Whether family or stock market ownership is best, the current debate has put the family firm back in the limelight.

Article
DIY RIP? Copyrighted image Icon Copyright: Monkey Business Images | Dreamstime.com article icon

Society, Politics & Law 

DIY RIP?

As more people choose to get someone in, rather than getting their hands dirty, is it time up for DIY?

Article
How much home do you own? Creative commons image Icon By Images_Of_Money via Flickr under Creative Commons license under Creative-Commons license article icon

Money & Business 

How much home do you own?

You pay your mortgage, month-in, month out - but how much home do you own?

Article
Managing my money: Your questions answered Copyrighted image Icon Copyright: Alan Mather | Dreamstime.com video icon

Money & Business 

Managing my money: Your questions answered

Martin Upton and Jonquil Lowe sit down to discuss some of the questions raised by learners studying Managing My Money.

Video
Money for Nothing Copyrighted image Icon Copyright: photos.com article icon

Money & Business 

Money for Nothing

Transcript of the BBC TWO Credit Crash Britain programme.

Article
The End of the Credit Affair Creative commons image Icon Tomas Fano under CC-BY-SA licence under Creative-Commons license article icon

Money & Business 

The End of the Credit Affair

Was it love or greed that brought about the end of the credit affair?

Article
Will Brexit force British retirees to return from Spain? Creative commons image Icon Andrew Havis under Creative Commons BY-NC-ND 4.0 license article icon

Money & Business 

Will Brexit force British retirees to return from Spain?

No place in the sun? Britons who followed the sun and relocated for the more pleasant Spanish climate are worried that when the UK leaves Europe, so must they.

Article
You and your money Copyrighted image Icon Copyright: Used with permission free course icon Level 1 icon

Money & Business 

You and your money

An important aspect of personal finance is the way in which individuals and households manage their debt, how much it costs and the different types of credit they can or cannot access. This free course, You and your money, explores these issues, with respect to the wider, changing, social and economic context.

Free course
12 hrs
Free Course: Business and Finance Fundamentals Creative commons image Icon t0msk under CC BY-NC-SA 4.0 licence under Creative-Commons license article icon

Money & Business 

Free Course: Business and Finance Fundamentals

Explore our free resources to help develop your fundamental business and finance skills.

Article