When renting becomes cheaper than buying

Sam Slator 29/08/2023 in Property

Soaring interest rates are causing misery for thousands of homeowners – and making it virtually impossible for many first-time buyers to get on the property ladder. In fact, it’s now cheaper to rent than get a mortgage for first time buyers in the UK, for the first time since 2009*.

The Bank of England (BOE) has increased rates an incredible 14 consecutive times over the past couple of years in a desperate bid to help curb rising inflation. These hikes are not only felt by those on variable rate deals, but also anyone remortgaging once their existing fixed rate terms have ended.

But what has this meant for companies involved in real estate? Who are the most likely winners and losers in the current economic environment?

What has happened?

Let’s start with a little background. At the time of writing, the bank rate stands at 5.25% while inflation is running at 6.4%, well ahead of the 2% target. Inflation, which is expressed as a percentage, is a measure of how much the prices of goods and services have gone up over specific periods.

It’s certainly been causing consumers pain. Earlier this year, research by Royal London revealed the average UK household was paying an extra £441 per month in bills**. To further illustrate the point, something that cost £100 back in 2020 would now be £120.39, according to the Bank of England’s inflation calculator***.

Impact of interest rates

The constant interest hikes we have witnessed have been introduced by the Bank’s Monetary Policy Committee to put the brakes on consumer spending levels. The idea is to bring down inflation to the Bank’s target rate of 2% by making it increasingly expensive to borrow money and more attractive to earn interest in savings accounts.

However, the Bank’s policy is particularly hard on anyone wanting to borrow money for a house, as well as those looking to move home. The average interest rate on mortgages recently hit 6.7% – compared to around 2.5% in 2021, according to the National Institute of Economic and Social Research****.

Falling house prices

Depressingly, UK house prices fell in July at the fastest rate since 2009 – when the world was gripped by a financial crisis, according to the Nationwide monthly House Price Index*****. The data showed the cost of a typical home now stands at £260,828, after a 3.8% year-on-year drop, with average mortgage deals around the 6% mark*****.

There were 86,000 completed housing transactions in June – 15% below last year and a 10% drop on pre-pandemic levels, according to Robert Gardner, Nationwide’s chief economist*****. “A prospective buyer, earning the average wage and looking to buy the typical first-time buyer property with a 20% deposit, would see monthly mortgage payments account for 43% of their take home pay (assuming a 6% mortgage rate),” he pointed out.

What does the future hold?

Unfortunately, there could be more pain to come over the coming months unless the Bank becomes convinced that inflation is on its way down. Of course, property-related sectors will be affected in different ways. Some will suffer because of the increases, while others may prosper.


A cooling property market isn’t great news for housebuilders. In fact, Persimmon was the second biggest faller on the FTSE 100 market over the past year ^. However, the sector, and Vistry in particular, did better in July^^. A holding in the Murray Income Trust, manager Charles Luke said the stock was one of the best performers over the month, “as UK inflation data came in lower than expected which raised optimism that the Bank of England’s rate hiking cycle could be coming to an end.”

Home improvement

There is an argument that people who can’t afford to move may decide to improve their existing properties instead – and companies such as Wickes may benefit. The company recently reported an improvement in second quarter trading, with group like-for-like sales for the first half up 0.7%, despite a “challenging” consumer environment^^^.

Chief executive David Wood branded it “an encouraging first half”. “Our performance has been underpinned by further momentum in Trade, as local traders continue to turn to Wickes to save them time and money, an improving trend in DIY, and a good performance in Do-It-For-Me,” he said.

Howden Joinery was another top performer in the Murray Income portfolio in July^^, again benefitting from the improvement in sentiment, but coupled with robust company results that were reported in the period.

“We believe that the current tightening cycle will ultimately restrict economic growth with the accompanying downturn helping to engineer a relatively rapid fall in inflationary pressures allowing significant interest rate cuts over the next 18 months,” Charles Luke said.  “Our focus on quality companies should provide protection through a downturn: those companies with pricing power, high margins and strong balance sheets are better placed to navigate a more challenging economic environment and emerge in a strong position.”


Of course, the banking sector generally loves rising interest rates as institutions charge more to borrowers than they give to savers. The net result is a bumper profit.

HSBC is one stock that’s performing exceptionally well. It recently revealed pre-tax profits had risen $12.9bn (£10.1bn) to $21.7bn (£16.9bn) in the first six months of the year. The bank is currently the largest holding in the Schroder Income fund with a 4.1% share of assets under management^^^^.

Elsewhere, the NatWest Group – another giant of the banking world – is one of the largest holdings in the Ninety One UK Special Situations fund^^^^. This portfolio aims to provide capital growth and income over at least five years by putting its money into companies it feels are undervalued.

*Zoopla, 22 August 2023

**Source: Royal London, 18 April 2023

***Source: Bank of England, Inflation Calculator, 24 August 2023

****Source: National institute of Economic and Social research, 17 July 2023

*****Source: Nationwide House Price Index, July 2023

^Source: Netbuilder, Thomson Reuters, Interactive Data, 24 August 2023

^^Source: fund factsheet, 31 July 2023

^^^Source: Wickes Group plc, 25 July 2023

^^^^Source: fund factsheet, 30 June 2023


Photo by chris robert on Unsplash

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