Home ownership not the only road to wealth
Shock, horror! Home ownership is falling and will continue to fall. But is that so bad?
A recent report from the Centre for Housing Research says that the percentage of households that are owner-occupied is expected to fall from 68 per cent in 2001 to less than 62 per cent in 2016.
And longer term data show that current rates are down from about 74 per cent in 1986.
I’m not arguing that owning your home is not a good idea. Most people want the security — the knowledge that no landlord can kick them out just when the kids are settled in to school — and the freedom to do what they want with their dwelling and garden.
Other advantages include pride of ownership and the ability to take in boarders or flatmates for extra income.
And, if you want to borrow for business and you have built up equity in your home, you can take on a mortgage, or add to your current mortgage, giving you much cheaper finance than alterative sources.
There are, however, some pretty strong arguments in favour of renting.
According to focus groups, “The key advantages of rental tenure were no responsibility for rates, insurance and maintenance; flexibility; and the ability to live in locations where owner-occupation was unaffordable,” says the report.
Flexibility is obvious. Tenants aren’t stuck at home doing maintenance or gardening that they don’t enjoy. As someone said, “Did you have a good weekend or do you own your own home.” And tenants can move much more easily and cheaply than home owners.
Beyond that, we could sum up the points made by the focus groups as: It’s cheaper to rent.
This is especially true these days. House prices have soared. On the back of that, many people have invested in rental property, to the point where there are too many landlords and too few tenants in some regions.
As a result, some rents have fallen, and generally they have not risen nearly as fast as house prices.
Given that house price rises are widely predicted to slow over the next few years — with quite a high likelihood that prices will fall — renters wanting to buy may well be better off staying on the sidelines for a while.
But should they ever buy?
For those tenants who value their flexibility and lack of responsibility more than they would value the advantages of home ownership, there is an option. Home ownership is not the only route to wealth.
The secret to doing well financially and remaining a tenant is to save the difference between your rent and the money your home-owning friends or family spend on rates, insurance, maintenance and mortgage.
That might be easier said than done. Many people say they like home ownership because the necessity to pay the mortgage gives them savings discipline they wouldn’t otherwise have.
But you can counter this by setting up an automatic transfer every payday into a savings account or, better still, directly into your long-term savings.
To have the chance of doing as well as you would have if you owned a home, you will need to go into a higher-risk, higher-return investment, such as diversified shares, a share fund or property — via a property fund or rental property. (Yes, there are people out there who are both tenants and landlords!)
You have one distinct investment advantage over home owners: you can diversify much further.
And, depending on how the different markets move, you might be lucky and end up considerably better off than if you had bought your home.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.