Renting is still the best buy in the UK
Posted on 29 April 2009 with no comments from readers
Looking around Salisbury in Southern England it is quite apparent that renting a home is a much better deal than buying one right now.
Consider a $750,000 home in The Close around the famous cathedral. It can be rented for $37,500, or a five per cent yield to the owner. If you buy your mortgage cost may be higher and you take the capital risk of further falls in the value of the home: only too real in the deflation of this year.
Yields too low
Besides does not a five per cent yield scream something about an over-valued asset? In Dubai investors demand and get 10 per cent yields on property, and pay no tax as UK landlords do on both rent and any capital gain.
Five per cent is a yield that is acceptable as a result of a long period of rising house prices in which landlords gradually ignored income and focused on capital gain. They still have not got their heads around the implications of falling house prices in the UK, and that makes renting a better deal than buying.
Compared to Dubai home rentals are very cheap. That house in The Close would rent for three times as much in a similarly central location in Dubai.
Devaluation illusion
Where house prices are deceptive in Britain is that the falls look less steep than in Dubai, but this is an illusion due to the devaluation of sterling. Factor in the 30 per cent loss of value of the UK pound and price falls of around 50 per cent over the past year are identical.
But actually the capital downside potential looks bad in both countries: the UK economy is in a deep recession and house buyers are a rare species, and by any analysis the actual UK capital prices look absurd compared to average salaries; in Dubai the upcoming supply and falling population are very bad for the immediate outlook for house prices.
However, there is no doubt about it, renting in the UK still appears a very attractive deal and rushing to buy now will likely prove an expensive error. The boom-mentality still rules UK house prices and rents, and that leaves rents cheap and houses expensive.
