Finance and Investments

Money illusion feeds into the kiwi obsession with property but as a recent Sunday Star Times article points out, many factors should be considered when weighing up the rent-or-buy options. The article quotes economist Shamubeel Eaqub from the New Zealand Institute of Economic Research who says the case for "active" renting instead of buying a home is stronger than ever.

"I think house prices are completely unsustainable on pretty much every valuation methodology," he said. "It seems very expensive not only from the perspective of buying an investment, but also from the perspective of an owner-occupier."
There may be no bubble bursting, and it may take a number of years of zero house price growth, but Eaqub has a "strong view" that prices will fall in real terms.
The Retirement Commission’s David Kneebone gives two scenarios:

1. The home buyer
To buy a median-priced home in July 2010, a median-wage earning buyer would have had to pay $350,147 and have a deposit of around 20%, some $70,029.
At a 6% mortgage rate, the annual repayments over 30 years would take $20,153 or about 32% of household income. At an 8% mortgage rate, closer to the norm, it would cost $24,665, or 39% of income.

That leaves the buyer with $756 a week (out of $1231) for everything else a household needs: food, electricity, phone, petrol, clothes, healthcare and so forth.
Plus, homeowners have to pay for rates, insurance for the house and maintenance that goes with it. If nothing goes horribly wrong, then budgeting $4000 a year provides a reasonable estimate.

2. The renter
Median rent in New Zealand is $300 a week, making the annual cost $15,600 – about $9000-$13,000 less than what the homeowner has to come up with for mortgage repayments, maintenance, insurance and rates.

If the renter invested that $9000 that the homeowner is spending every year at 7% (as per sorted.org.nz), he or she would have $50,000 saved in five years.
If house prices are stagnant in the period, the homeowner would be $100,000 behind the renter (that is, the $50,000 that the renter has gained and the $50,000 the owner paid in extra costs).

If the renter then bought a house, he or she would be buying at a lower "real" price, given inflation over the five years, and the price of the home would have fallen in proportion to the median wage.

Ultimately of course each householder must make their own decision. Generally speaking though renting is the most fiscally sensible option.