Should you rent for life?

The increasing difficulty of getting a foot on the property ladder may make renting for life seem like a more attractive - or perhaps the only - housing option. But is it a good idea?

For those looking to take the first step onto the property ladder, pessimism about their chances of home ownership is rife - and news that deposits have now hit a 40-year high will do little to improve that.

According to the Chartered Institute of Housing, at least 100,000 first-time buyers who have no help from the 'bank of mum and dad' were unable to enter the housing market last year as the number of low-deposit mortgages slumped to a record low.

In fact, findings from MyVoucherCodes show that 58% of people think they will never own a property, with more than two-thirds of these claiming they would "never afford a deposit" and 77% stating they would "probably always rent privately".

Elsewhere, figures from Halifax show that in 2010, first-time buyers were required to find an average deposit of £28,770, while the Council of Mortgage Lenders (CML) estimates the average age of those first-time buyers who have not had financial assistance has risen from around 33 in late 2007 to 36 now.

So, with the average age of the first-time buyer creeping up and affordability a growing problem, could this be the generation who, not out of choice, but out of necessity, rents for life?

Renting is on the up

In the UK, where an Englishman's house is his castle, renting has long been viewed as the poor relative to home ownership.

However, recent findings from the Communities and Local Government (CLG) show the private rented sector now accounts for 14% of all households in England, while the Association of Residential Letting Agents (ARLA) claims renting is becoming "increasingly popular".

The fact is, there may be little choice for the growing number of 20- and 30-somethings who find themselves priced out of the property market - and faced with renting for the longer term.

Melanie Bien from broker Private Finance told MSN Money: "This generation of would-be homeowners may have to get used to the idea that renting is the new reality," she said. "With lenders demanding at least a 10% deposit, only those fortunate enough to be able to call on their parents for financial assistance are able to realise their home ownership dream. Those who can't are now forced to rent for far longer."

Ian Potter from ARLA agrees that, while more and more people are renting post-recession, for many, this is through need, rather than choice. He said: "With the average age of a first timer now in the late 30s, renting could become the norm for more people than ever before. And, as long as the demand for homes outstrips supply, this trend is likely to continue."

On the continent

While this all makes for pretty gloomy reading for those dreaming of taking the first step, it's worth looking to the continent, where many people are happy to rent for life.

Both France and Germany, for example, have a thriving rental culture, and share none of our preoccupation with home ownership. In fact, in Germany, nearly half of the housing stock is private rental, and the mind-set is completely different.

A similar pattern is repeated around the globe, according to CLG, with the private sector accounting for 32% of the housing stock in the US, 21% in Australia, 18% in Belgium, 28% in Canada, 20% in France, 27% in New Zealand, 21% in Sweden and 57% in Switzerland.

In fact, despite growth in recent years, at just 14% of the housing stock, the private rented sector in England is still small by international standards. Would it really be such a bad thing if a trend of long-term renting emerges here?

There are, of course, upsides to renting, such as freedom from the responsibility of upkeep and maintenance, the flexibility to live where you want, and also to "up sticks" whenever you want.

Neil Young from letting and management specialist Young London told MSN Money that attitudes are changing: "We're still far behind continental Europe, but any stigma once associated with renting rather than owning is waning as the average age of the first time buyer continues to head upwards."

How do the costs compare?

The problem is, while many Brits are not averse to renting as such, there is a feeling that over the longer term, this is akin to throwing money down the drain.

And while in the past tenants have taken some solace from the fact that renting is the cheaper option on a month-by-month basis, even this is no longer the case.

"With interest rates at historic lows, those who can get mortgage finance are currently enjoying some very cheap rates," said Bien.

In fact, new research from property search website Zoopla shows that renting a home is now more expensive than buying across 80% of Britain, based on average rents for two-bedroom flats in the 50 largest cities and towns.

Nonetheless, to enjoy cheap monthly mortgage payments, you will need to drum up a big enough deposit to satisfy a mortgage lender in the first place.

"If you're aiming for the minimum deposit - just 10% of the property price - you will need a very good credit score," said Bien. "Lenders view those with more modest deposits as being higher risk than those with 25 or 40% deposit to put down. As a tenant, you will usually be required to stump up just one or two months' rent."

So how does this compare to the continent?

The short answer is that, outside the UK, renting remains the more affordable option - and therefore the norm.

In France, for example, those who rent do so because their income is too high for subsidised renting, but too low for home ownership in expensive areas. This is according to CLG, which found that nearly a fifth of private renters are in the top income quartile.

In Germany, CLG figures show renter households are over 40% of those in the top income quintile, and that average equivalent incomes do not differ greatly on average between renters and owners.

Regulation to protect tenants

Not only is renting the more affordable option in many countries on the continent, it is also the preferred option because of the high level of regulation.

According to CLG, some countries, such as France, Germany, Sweden and Switzerland, have a degree of restriction over rent levels - or at least rent increases - and a strong security of tenure for tenants.

In Germany, for example, renting is attractive because of the availability of good quality accommodation as well as the high degree of tenure security, with tenants enjoying notice periods of three to nine months, and termination of contract only in limited circumstances, such as rent arrears - even sale of the dwelling does not break the lease.

As such, it has been suggested that the private rented sector in Germany offers the security that is sought in home ownership in other countries such as the UK.

"Much of the private rented property in continental Europe is owned by institutions, such as pension funds and large-scale investors, who have a co-ordinated approach to managing their properties," said Young. "They also take a long-term view, and can offer renters stability and certainty in the form of longer tenancy agreements."

Limited regulation in the UK

So how does this compare to the regulation in place here? Well, in England, there are no limits on rent increases for sitting tenants, and very limited security of tenure (typically no more than six months).

"As there is no government-led regulation, things can and do go wrong," said Potter from ARLA.

Admittedly, there is the Tenancy Deposit Scheme, and access to an Ombudsman scheme which can offer redress if things go wrong, but many renters feel that landlords do not make life easy for them.

As a tenant, you have to fork out a big deposit, you're not allowed to decorate, and there are many anecdotal tales of tenants being thrown out of their rented property for no apparent reason.

Certain renters have found themselves at the hands of small-scale buy-to-let investors who see them simply as a means of making money - with little regard for the rights or needs - while more and more are now finding themselves in properties being let by the wave of 'reluctant landlords' who have no experience of letting a home or dealing with tenants, but who have been forced to rent because they can't afford to move.

The longer term

As things stand, it's hard to imagine we will ever see a professional, European-style rental market here in the UK, and until that happens, it's likely that the dream of home ownership will remain very much alive.

However, Young warns that buying in the UK is not set to get cheaper any time soon. "Lenders are unlikely to alter their deposit criteria in the short-term as they keep an eye on the early 2012 repayment date of the government bailout, and seek to bolster their balance sheets," he said.

The focus, then, must be on making changes to the private rented sector, which means real investment and improved regulation along the lines of our continental counterparts.

The problem is, all the large private rented sector countries overseas offer taxation advantages - especially to individual investors - which are more favourable than those in the UK, and these have been very important in encouraging investment in the sector.

"Service levels are increasing in the UK, and there is a drive to encourage institutional investors into the private rented sector," said Young. "But while there's an appetite among investor landlords - and tenants - for this type of professionally managed accommodation, it's still early days."

Only by addressing these issues will the UK's private rented sector provide a better and viable alternative for the increasing numbers of people who will simply not be able to buy a home in the future - and only then might the British love affair with home ownership finally come to an end.


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