The financial returns from buying versus renting : the experience of first time buyers in different regions of the UK, 1975-2011
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In Britain households’ strong aspiration to own is sustained by a set of perceived financial and non-financial benefits from buying rather than renting. This research estimates for the first time the nominal financial returns over three booms and busts from leveraged buying versus renting for first-time buyers (FTBs) using the discounted cash flows (DCF) approach. The analysis is based on financial simulations of 407 average FTBs (cases) that buy in each year over the period from 1975 to 2011 in eleven regions of the UK. The research finds that all FTB cases have created or at least preserved wealth even without the impact of capital gains. This provides evidence that the growing owner-occupier aspiration has been rationally justified and sustained by empirical financial benefits. This is also evidenced by finding that the role of intrinsic value in creating wealth from leveraged buying has been as significant as the role of capital gains. The research also finds that the majority (90%) of FTB cases require between 1 and 3 years to breakeven. All the findings suggest that ‘all roads lead to the owner-occupation’. The research finds significant impact of timing on the nominal empirical return and breakeven point. The empirical return tends to significantly fall for those FTB cases that purchase near or at housing peaks and significantly rise for those that purchase during housing downturns. The breakeven year tends to rise for those that purchase near or at housing peaks. The research develops a regional return ranking and finds that the regions with higher returns, apart from London, tend to have higher rent yields, relatively lower down payment ratios and much lower absolute house prices than those regions with lower returns. London, with the highest regional return, depends mainly on its extraordinary growth rate in house prices to sustain its leading position.