Should first-time home buyers wait and invest instead?

Buying a home, even for those who’ve already been through several purchases, tends to mean quite a few sleepless nights and scrutiny of finances.

For most of us, it’s by far the most expensive item we will ever purchase. But it’s also been seen for a long time as one of the most important assets to hold in terms of financial growth, with homes accounting for 40% of the wealth of an average Brit, according to the Office for National Statistics (ONS). For many heading towards retirement age, purchasing a house was their best investment.

However, for the current generation, it’s very difficult to say if buying now or waiting and investing leaves you in a better financial position. Interest rates are high, and house prices are stagnant, leaving buyers in a tricky position. Meanwhile, rent prices have been increasing for those that choose to wait.

Someone who decided to buy five years ago versus waiting would end up about financially even. What is best for each buyer will depend on their individual circumstances, but here’s how the maths adds up. You can find these figures for your own area and use your own financial situation to create a more accurate picture for you.

Doing the maths

Five years ago, according to Nationwide, the average house price in the UK was £247,535, meaning a 20% deposit would equate to £49,507. In the intervening five years, UK house prices grew by 12.62%, making that average value £278,773 today, a £31,238 increase. It’s worth recognising you don’t own the property outright, just the portion you have paid off, or which is already covered by the deposit.

Even if your equity in a property increases as you make mortgage payments (unless you have an interest only product), this means you arguably don’t benefit fully from the overall increase in the property’s value but for ease of comparison let’s ascribe all of that value to our first-time buyer.

If instead you’d put the £49,507 to work in the markets, you could have generated £37,615 before fees based on the performance of a global tracker fund over the same timeframe.

You’d have a mortgage or rent to pay as well during this period. Five years ago would be quite a fortuitous time to take out a mortgage since rates were at 2.64%, making the median mortgage in 2021 around £668 per month due to effects from Covid 19 according to data from the ONS. You’d also face legal fees, moving fees, and more in the purchase, which on a rule of thumb basis could run to around £5,000. Average rent payments were a bit higher in 2021, at £795 per month, according to the ONS.

Depending on what type of mortgage you had, and rental increases, there’s a good chance that both values would increase over the five-year period. However, assuming no change and looking at fees and mortgage versus renting costs, owning a house would be slightly cheaper over the last five years than renting, by about £2,655.

But when factoring in the growth in value of the property compared with what you could have made by investing the deposit amount instead, renting and investing money would edge ahead.

However, this is quite a small margin, and it’s important to note that we’ve had to make assumptions to get there. For example, if one buyer had a five-year fixed rate mortgage beginning in 2021, and another lived in a flat where rent increased in line with the average, it would alter things. In addition, if an investor had chosen to de-risk their investments in the run-up to using the money to make a property purchase the growth of investments would likely be lower.

Plus, as discussed, increasing your equity in a property as you pay off a mortgage provides an additional benefit.

Those who are considering buying might run through the rough figures that apply to their own situation to get a picture of where they would stand.

What’s right for you?

Buying a house is a big financial decision, but it’s also a big step in your personal life. Sometimes, the move that’s right in a financial sense isn’t the move that’s right for you, and the good news about the maths looking about equal for each option is that you can think about what you want to do rather than there being an absolute ‘right’ decision. After all, that is what most of us are building wealth for: to be able to live the life we want to.

Owning a home can create a strong sense of security for many people. It means you won’t have to fear an eviction or a rent increase each year, and you get more autonomy over the space you live in. It’s a common life milestone. On the flip side, many people purchase a first home and realise there’s lots of work to be done that is suddenly their responsibility or that they’ll need to move again within five years as their family expands. Not only will you face the cost associated fees again, but it will likely be time consuming and stressful.

Where do we stand now?

The average first-time buyer in the UK is now aged 34, which makes sense when you consider the type of wealth you need to build up to get yourself on the housing ladder, where the average house price is £278,784. Most people aren’t coming up with the money alone, with 52% relying on two or more full-time incomes and 30% receiving a gift from family. If this isn’t an option for you, or you simply don’t want to buy right now, waiting a bit longer to build up your deposit isn’t likely to make a big difference to your financial situation.

Savills estimated that UK house prices will grow by 18.5% in the next five years, a significant downgrade from their 24.5% forecast last year. Knight Frank has also downgraded their expectations, which now sit at 20.4%. But there’s no way to know for sure what will happen, in the same way that it’s impossible to know what the market will hold in the next five years.

If you’re ready to buy, a slow market doesn’t mean it’s the wrong decision. But being aware that property isn’t guaranteed to be the sure bet it was for your parent’s generation will be key. If the maths isn’t adding up to buy the house you truly want, waiting and building your deposit instead of getting on the housing ladder right away could be a savvy move.