Is owning a house cheaper than renting it?

Renting is throwing your money down the drain, right? Wrong.

As readers of this blog know to their cost, I’ve been banging on about the abundant evidence that there is no housing supply crisis in the UK. At least not one that either explains the explosion in house prices over the last 20 years or has got any worse over that period. But there are other shibboleths of the orthodoxy that is the UK’s housing obsession that we should examine more closely.

An important one is the axiom that renting a house is more costly than owning it. On this view renting is ‘throwing your money down the drain’. And it lies behind much of the moral panic about the housing situation and the demand to ‘do something!’. After all, if the distribution of property ownership is condemning the poor and the young to throw their money away, that would to most people be seen as grossly unfair and something requiring urgent action of some sort. But we can’t say that renting is more expensive than owning.

What about all those charts showing renters getting a raw deal?

The view that renters are getting a raw deal is given intellectual ballast by various analyses that purport to compare the cost of housing for renters and owners. A good example is this one from the Resolution Foundation reproduced in last week’s Centre for Policy Studies report, which shows that private renters pay by far the largest portion of their income on ‘housing costs’. Clearly income is a factor in here, but the point it’s used to make is that renters face higher costs than owners — especially outright owners.

These charts consider what people pay out each year in respect of housing. But that’s not a meaningful measure of housing cost and has the side effect of implying that outright owners have cheap housing, when the reality is that they don’t — they just have income from capital.

What costs do owner occupiers really face?

To see this more clearly it’s worth thinking about all the elements of housing cost. Renters pay rent and estate agent fees when moving. Owners pay their mortgage. But for a proper comparison we need to break down the full ownership costs further.

Owners’ mortgage repayments can be split into the interest they pay on their loan and the capital repayment. Only the first part of that is a cost (i.e. you pay the money and you don’t get it back). On to that we can add re-mortgaging costs. There’s also maintenance and depreciation to consider, a cost that renters don’t have to worry about. (Nor are those costs purely financial: how many owner occupiers do you know who seem to spend an inordinate amount of time fixing things or doing DIY?) Then there’s stamp duty (council tax hits renters and owner occupiers) and the other fees involved with buying houses.

The final element of the cost of owning is the foregone income from the capital tied up in the equity part of the house. If you own a £200k house outright you don’t pay any mortgage interest, but that doesn’t mean the house is costless. That £200k asset you own isn’t paying you any income. If you were to invest it in any other asset — some corporate bonds for example — your nest egg would yield a steady income. The outright owner is giving that up that income— a very real cost — in return for living rent free. On any meaningful definition this is a cost, even though not payments are made.

In the RF/CPS chart above, outright owners’ costs appear to be so low mainly because foregone capital income, transaction taxes, some depreciation costs are left out because they don’t appear in the survey data that captures monthly payments. But the costs are very real nonetheless.

We can do a stylized comparison of those costs for a £200k house using some made-up-but-plausible figures. In the chart below the owner occupier pays a 75% LTV mortgage at 4% interest; she’s missing out on earning 4% in a risk-equivalent asset on the quarter of the house that she owns outright; and she pays 1% of the value of the property in taxes and depreciation combined. That’s an annual cost of £10,000 — the same as a renter facing a rental yield of 5% for an equivalent house.

What are the actual costs of renting and owning?

Those figures are made up of course. So what does the real data suggest? In the chart below I’ve taken the following inputs relating to October 2017, October 2012 and October 2007 to do a rough-and-ready bottom-up calculation:

  • Average rental yields were 4.4% in October 2017 according to the Your Move Buy to Let Index. Applying this to the average house price gives a rental cost that is extrapolated to 2012 and 2007 using the ONS’s rental index, IPHRP, to determine past rent.
  • Average UK house price from the UK HPI, which was £224,000 in October.
  • The total number of dwellings in the UK is based on DCLG data grown forward (see here for how), suggesting about 28.8 million dwellings this year. Multiplying by the average price values the UK’s residential property stock at approximately £6.4 trillion in 2017.
  • Two-year fixed-rate mortgages at 90% LTV averaged 2.4% in October this year, according to the Bank of England, well down from 5.6% in 2012 and 6.1% in 2007.
  • The yield on a risk-equivalent asset is assumed to be equal to the mortgage rate. This applies to the 10% of equity the owner has in this example.
  • Depreciation of the UK housing stock ran at approximately £48 billion by 2017, based on the ONS assessment of consumption of fixed capital in 2016. Dividing by the stock value implies an average annual depreciation rate of about 0.74%. The rate was 0.96% in 2012 (since rebuild costs were a bigger proportion of house prices, when house prices were lower in 2012), and 0.83% in 2007 by this calculation.
  • Stamp duty receipts, at 8.6bn in 2016–17, are taken from HMRC’s statistics, suggesting an average annual tax rate, as a proportion of stock value, of around 0.13%.

On the renter’s side this misses out estate agents’ fees, while on the owner occupier side it ignores remortgaging fees, house-selling costs, the personal labour costs of owing (all those hours in B&Q looking at tiles). But it’s a decent approximation of the real comparison. The chart below shows how the true costs of renting and owning stack up in the three years I’m looking at when calculated in this way.

Sources: as described in text

The latest data suggest that owning is currently cheaper than renting the same average house. But more often than not in recent years the reverse has been true. Owning the average house cost a great deal more than renting back at peak of the market in 2007, and a fair amount more in 2012. If you go back further with the same approach — as Oxford Economics did in this report — the costs were about equal in the decade up to the mid-2000s.

That stands to reason because theory suggests that the costs of renting and owning should be equal over the long term. Parking the benefits of security of tenure (discussed below) — or indeed for renters, flexibility of tenure and the ability to tailor housing consumption to need — the main financial benefit of owning comes from the fact that you avoid having to pay rent. So short-term divergence aside, the housing market drives prices up — or down — to the point where the cost of owning at the prevailing mortgage rate approximates the cost of renting that same house.

Think like the ONS

Indeed the assumption that the cost of owning equals the cost of renting — or rental equivalence — is a core assumption behind the ONS’s new CPIH measure of inflation. To quote the Deputy National Statistician:

“[Rental equivalence] values the ‘housing services’ you get from your house by looking at what it would cost to rent an equivalent property. This is based on the idea that if you did not own a house, you would need to rent one. Or alternatively, by living in the house I own, I am forgoing the rent I could charge. Therefore the equivalent rent is a good proxy for the costs of housing for owner occupiers.”

What about capital gain and leverage?

Finally, it’s worth dealing with two obvious objections. Even if the annual costs of renting and owning are equal, is it not the case that capital gains, compounded by leverage, make housing a no-brainer for wealth accumulation? Well not really.

The capital gains part of the argument is spurious. Capital gain — or loss — in property is no more likely than in any other risk-equivalent asset that one could invest in. So renting while investing your money in other assets should yield the same wealth accumulation outcome. In fact, since owner occupiers lose the opportunity to diversify their investments they are taking on more risk than a diversified investor for the same return.

The second part of the objection is about the role of leverage. It is true that there is no other asset that Joe Public can borrow hundreds of thousand of pounds to invest in. So when house prices rise the capital gain is amplified compared to what’s available in any other asset. And it’s true that if you’re leveraged and the asset goes up in value, you’re a big winner. But it’s also true that if it falls you risk bankruptcy. All leverage does is to magnify the gains and losses that one would see on any other asset, but it doesn’t change the expected return.

Just because the baby boomers benefited from a 35-year fall in global interest rates, pushing up house prices, and unexpected bursts of inflation, which eroded their debts, doesn’t mean the next 35 years will go the same way. Encouraging people to, quite literally, bet the house on leveraged capital gain is a dangerous wealth accumulation story that politicians would be wise to avoid.


The costs of renting or owning a given house vary according to all sorts of things. But both theory and data suggest that those financial costs are broadly equal over time. Owning costs about the same as renting.

There is one major difference in the value one gets from owning or renting that this analysis of costs ignores: owners have security of tenure. And this is where the important implications for policy lie. Perhaps if security of tenure in the rented sector were improved through regulation, there would be no reason for politicians to give any more speeches about the benefits of home ownership, because the key advantage of ownership would have been extended to renters too.