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For generations, we’ve aspired to be home owners. But evidence shows we’d be better off renting – both individually and as a nation. In Germany and Sweden, the rental market is credited with making people wealthier and happier, and with creating more attractive cities. So, is it time to sell up?

The woman’s expression was one of mystification and mild disgust. “You’re renting ?” she said, lowering her voice as though uttering a swear word.

A few hours before, I had met this woman at a friend’s birthday party. We had fallen into a polite sort of chit-chat and when she asked where I lived, I told her that my boyfriend and I had just moved into a new house. We were renting, I explained – taking a step off the property ladder to see what would happen to the housing market before committing to anything more long term.

The woman looked at me with barely disguised astonishment. It was as though I had committed a social faux pas by admitting to something rather odd and off-putting, like a tendency to wear the same underwear several days in a row.

But really, the explanation was quite simple. My old one-bedroom flat, which I own (inasmuch as you can own anything when you’re paying off a 90% mortgage), had been on the market for more than four months and had failed to attract a single offer. The estate agent blamed the dearth of first-time buyers. “Now mortgage companies are asking for deposits of £20,000,” he said, as he zipped up his mini-briefcase and walked out of the door for the final time. “Unless their parents can help them out, it’s almost impossible for them to buy.” The fact that my flat wouldn’t sell had a knock-on effect: it meant that we, in turn, could not buy as I would be unable to raise enough cash for my share of any deposit. Instead, I let out the flat. And my boyfriend and I rented somewhere a bit bigger.

Ours is not an exceptional case. The recession and the stagnation of the housing market have, over the past three years, contributed to the fact that Britain is increasingly becoming a nation of renters. Although house prices are falling, they still remain out of the reach of the average earner, particularly now that banks and building societies are tightening up their mortgage regulations. This year, 67% of households in the UK are owner-occupied, down slightly from the all-time high of 71% in 2003. By 2020, that figure is forecast to slip even lower to just over 60%.

Renting, by contrast, is on the up: in 2008, the proportion of households privately renting had jumped to 14% from a low of just 8% in the late 1980s. The estate agent Savills predicts that this figure will rise to 20% over the next decade. At the same time, a survey of more than 2,000 young people by the Chartered Institute of Housing last year found that only a third of 18-24 year-olds believed that home ownership was their “ideal living situation”.

And yet, as that woman at my friend’s birthday party so amply demonstrated, renting still carries with it a whiff of social stigma. In spite of the fact that it comes with many conspicuous benefits – when the boiler breaks down, someone else sorts it out for you and there is none of that nagging anxiety about whether your home is going up or down in value – renting is still seen as the lesser option.

“There has been a dramatic drop off in the number of young people who aspire to home own,” says Sarah Webb, the chief executive of the Chartered Institute of Housing. “But it’s still the tenure of choice. The reason for that is not inherently anything to do with the tenure itself, it’s because home ownership became the investment vehicle of choice when there was no viable alternative.”

For generations, we were led to believe that an Englishman’s home was his castle. Successive political regimes since the late 1970s have told us that home ownership should be the ultimate aspiration of those who seek social and financial stability. It created citizens who were more involved in their local communities because they had a vested interest in making their neighbourhoods safer. And when Margaret Thatcher introduced legislation in the 1980s enabling people to buy their own council houses, she explicitly compared the business of government to running a household. “Any woman who understands the problems of running a home will be nearer to understanding the problems of running a country,” she said. And therein lay the attraction: owning a home gave you a stake in something bigger and a sense of self-respect. However much the rest of your life might be lived in the shadow of bigger forces – the employers who dictated your salary or the supermarkets which shaped your grocery bills – your house was your own dominion. There was no one breathing over your shoulder telling you not to paint the bathroom purple.

We were encouraged in this misty-eyed love affair with bricks and mortar by countless television programmes. As a nation, we collectively fell in love with Sarah Beeny, who tempted us to ever-greater excesses with the allure of open-plan kitchens and flexible living spaces. Through the boom, we watched avidly as couples escaped to the country, or relocated to bigger houses or built their own homes out of reclaimed wood and granite. We gorged ourselves on property until our stomachs were full, our eyes were greedy and all of us knew without even having to ask that corner baths would never, ever be a good idea.

As the economic bubble grew larger, developers could buy up a block of flats, leave them empty for two years, and then sell them off at a profit. Affluent professionals worried about their pension could snap up a house, extend into the loft, and be guaranteed a nest egg that offered far greater returns, with far less risk, than stocks or shares. Against this background, those of us in our 20s or 30s who were setting up home for the first time found ourselves beset by panic: if we didn’t buy as soon as possible, we feared prices would continue to rise and we would have missed our chance. There was no point in spending dead money on rent, lining someone else’s pocket, when an interest-only mortgage would probably cost less.

This was my reasoning, back in 2005, when I bought my first flat at the age of 25. I went to a mortgage adviser who charged no fee and who, within half an hour, had organised an interest-only loan for a £149,500 one-bedroom flat in north London that would cost me less on a monthly basis than my rent at the time. The deposit I scraped together came to a mere £5,000. I had no means of paying off the loan at the end of its term, but the adviser told me not to worry about such trifling details: the important thing was to get on the property ladder, even if that ladder was missing several rungs and collapsing with rust. According to Dr Oliver Marc Hartwich, who has written several papers on Britain’s housing issues for the right-of-centre think tank Policy Exchange: “In Britain, there’s a rush to buy a house as fast as you can because otherwise there’s a fear that you’re not going to be able to afford it.”

Hartwich, originally from Germany, points to the example of his own country as a different model. In 2007, 67% of German households were renter-occupied, thanks largely to a de-centralised planning system that encourages building developments and a legal system that gives tenants greater security and more freedom to decorate their own homes. Whereas in the UK house building targets are set by Whitehall, in Germany, where central government grants are linked to population and tax revenues, local politicians actively compete to attract more residents to their cities by making them more pleasant places to live. Any generated revenue goes back into the local community – by building a new swimming pool, for instance, or lowering parking charges.

When local residents can clearly see the benefits of building pleasant housing in order to entice new inhabitants to a city, Hartwich says it defuses the kind of not-in-my-back-yard mentality that prevails in Britain. Switzerland has a similar model – only a third of Swiss households are owner-occupied – and both countries are building new houses that are, on average, 40% larger than their UK equivalents. Where the supply of new homes meets the public demand, house prices stay stable. And because house prices are stable, there is no incentive for people to buy as an investment opportunity.

“You can still buy a house in Germany for the same price, in real terms, as you could in the 1970s,” says Hartwich. “If I look at the example of my parents – they were in no rush to buy because they could live very well in rented accommodation. They put their money in a bank account and bought their first home when they were in their early 50s and it took them six or seven years to pay off a small mortgage. They were extremely relaxed about it.”

In Britain, by contrast, new building has been severely limited and property prices have risen steadily as a consequence. There is a waiting list of 1.8 million applicants for social housing and the houses we have built are the smallest and costliest in Europe – “rabbit hutches on postage stamps,” as the economist Alan W Evans once put it. Despite coalition plans by the housing minister Grant Shapps to devolve planning decisions, the Chartered Institute of Housing estimates that we are only building one in three of the houses we currently need – the lowest rate in any peacetime year since 1924. “If you look at population growth excluding immigration,” says Sarah Webb, “you can see that we’re building the lowest number of houses for years at a time when demand is the highest.”

Why? David Orr, the chief executive of the National Housing Federation, blames “our ‘nimby’ culture and planning system” for having “choked off new supply at levels far below what might otherwise have been provided and continue to do so. At the core of this obsession [with home ownership] is the fact we’ve created a market which has seen house prices rise by 3% per annum for 20 years – fuelled largely by a chronic under-supply of new homes.”

Is this obsession irrational? A handful of recent academic studies suggests so. Fifteen years ago, Andrew Oswald, a professor of economics at the University of Warwick, was one of the first to note that countries with high rates of home ownership (such as Spain, where 89% of households are privately owned) seemed also to have high rates of unemployment. “I argued that that would ossify your labour market and economy,” explains Oswald. “You need labour mobility in an economy, with workers who are able to drop into the right kind of job slots, whether they pop up in Glasgow or Bristol. I continue to worry about the possibility that home ownership slows down people’s ability to move around.”

Is he a home-owner? “I am but I’m almost 60,” he chuckles. “I’m not advocating a Britain where no one owns their own home. I’m advocating a Britain where no one worries about owning their own home until they are middle-aged.”

Nor is there any guarantee that owning a home makes you wealthier: a study by the Centre for Housing Policy in 2003 found half of those living in poverty were home-owners, despite government policies aimed at the poorest sectors of society being heavily skewed towards those in rented accommodation. And countries with a higher proportion of renters also have a higher GDP: Switzerland has a GDP of £46,719 per capita, compared to the UK’s £27,915.

Despite all evidence to the contrary, the majority of Britons still believe that owning your home is good for you. “You can start to feel a bit depressed about the cultural ‘ingrainedness’ of home ownership,” admits Sarah Webb. “We have been sleepwalking into this crisis for quite some time now.”

The historian Martin Pugh, author of We Danced All Night: A Social History of Britain Between the Wars , traces our love affair with home ownership back to the First World War. “The figures that we have for pre-1900 housing tenure show that well over 90% of people rented,” says Pugh. “That means even quite wealthy people, who could have afforded to buy houses, didn’t. It wasn’t as closely associated with social status as it is now.

“But resentment towards landlords started to build up through the Victorian period because of the growing price of land. The Edwardian government did a lot of social reforms but hadn’t quite got around to housing before World War I broke out.”

The war speeded up the process through the migration of thousands to work in munitions factories. In Glasgow, where there was a high concentration of munitions firms, the influx of workers gave landlords an opportunity to increase their rents. The move, coming at a time of steep rises in costs for working-class families, was seen by many as a blatant example of unpatriotic war-time profiteering and provoked a series of rent strikes. Once the Armistice had been signed, says Pugh, both Conservative and Labour parties were quick to latch on to the benefits of home ownership.

“For Conservatives, it was one way of giving poor-ish people a stake in the system and making them into mini-capitalists themselves. For Labour figures like Ramsay MacDonald or Jim Callaghan, home ownership was the way people could free themselves from the grip of the landlord.”

At the same time, the idea of owning one’s own home was given an added cultural potency by the return of soldiers from the front. “There was a general promotion of family and marriage through women’s magazines,” explains Pugh. “There was a fear – although it wasn’t actually true – that not enough people were getting married and having children because of wartime losses and that created some pressure to set up home. Women were subjected to a great deal of propaganda about the ideal family life and your own home was presented as part of that aspect.”

Now, almost a century on, we are faced with a situation where home ownership, the ultimate aspiration of generations of Britons, is becoming increasingly untenable. On the one hand, house prices still remain too high for most of us. On the other, social housing has become a marginalised sector, associated with deprivation and impoverished life chances. Those who earn more than £12,000 a year but less than £25,000 are stuck in between – too rich for social housing; too poor for the mortgage lenders.

So what is the solution? Grant Shapps believes it lies in the de-centralisation of planning laws so that communities can have more say in the building projects that affect them (and, as a result, might be less likely to oppose development). One of his first actions after the coalition government came to power was to scrap the target for building 3m new homes announced by Gordon Brown in 2007. He is also introducing a new set of financial incentives to benefit local communities, bringing the UK more in line with the Swiss and German models, including matching council tax on a pound-for-pound basis for six years on all new homes. “Our housing agenda represents a set of home truths that challenge current thinking,” Shapps wrote in the Guardian earlier this year. “Rather than timid ideas that limit aspiration, we’re presenting a set of truly radical proposals for real housing change in this country.”

But others, such as Sarah Webb, remain anxious that the current crisis of supply is too extreme for the ditching of centralised targets. “We do need new measures and while I agree with Grant Shapps that we shouldn’t have a top-down approach, actually right now we’re struggling with a lack of supply,” she says.

Webb believes in a two-pronged approach. First, the development of government-backed alternatives for investment outside the housing market. Secondly, the introduction of a safe and reputable rental sector, possibly by encouraging well-respected businesses such as John Lewis to invest in housing. “I started thinking one day that if I were 32, living with mum and dad and they couldn’t release the equity needed for a deposit, who would I like to rent a flat from?” says Webb. “And I came up with the answer: John Lewis.”

Perhaps, in the future, we will be able to rent flats from the same place we buy lampshades, but such a prospect seems a long way off. However much we can all appreciate the arguments in favour of renting, most of us still hanker after the long-term idyll of bricks, mortar and a white picket fence. The proof of this comes not only from academic studies but from everyday, anecdotal evidence. For instance: almost everyone I spoke to for this article had spent a considerable amount of their time examining the issues and had emerged with serious misgivings about buying houses. And yet, of course, they all admitted to owning their own home.

Elizabeth Day is a feature writer at The Observer. Her debut novel, Scissors, Paper, Stone , is published by Bloomsbury in January Renting property First-time buyers Property Homes Elizabeth Day guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds

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