Rent of buy Reports for first home buyers

22 May 2009

A monthly assessment of renting a property verses taking out a mortgage.

To buy or to rent, that is the question...

For many, the goal of owning your own home remains a powerful objective. But affordability issues are a serious barrier to achieving this, and renting is often seen as a ‘second best’ outcome – what you are left doing if you can’t afford to buy.

There is more to owning a home than affordability of the mortgage payment, but affordability is an important element. And affordability of renting is as measurable as affordability of the mortgage.

The real question is whether it makes budget sense to rent or buy.

Leaving aside the ‘savings’ aspects of buying (accumulating the principal paid as equity, participating in the capital gain), we have developed a straightforward comparison between the affordability of renting, with the affordability of making a mortgage payment.

Firstly, the assumptions:

We assume you are a first home buyer household, renting a 3 bedroom house and paying a median rent. Your household income consists of one male median income and one female median income from the 25-29 age group.

We assume you want to buy a similar house, but as you are starting out, it will be one priced in the first quartile. You have saved a deposit based on 20% of your household income for the past four years to a maximum of 20% of the house price. The resulting mortgage is for 25 years as a traditional table mortgage, with the current interest rate on a 2 year fixed contract.

Our study assumes the ‘affordability’ issues are those you face when you want to make the transition. So we are not looking at comparing future benefits or costs, only those in the current month.

The rent or buy results for April:

In April 2009, it takes 23.0% of household take-home pay to service the mortgage on a lower quartile priced house.

But it also takes 23.1% of household take-home pay to make the median rent on a 3 bedroom house.

That means In April 2009, it takes 0.1% less of your household income to afford the mortgage than to rent. Of course, this assumes you have saved the deposit to afford a mortgage, and that may well be another big barrier for many.

It takes a household 3.4 years (with a saving rate of 20%) to save a 20% deposit, as now required by most banks.

The trend has been moving in favour of buying. However in the past three months, rising interests and house price has turned the differential in the way of renting.

Key drivers of April:

Rent affordability

The median weekly after tax income for a first-home buyer household in New Zealand was $1,343.18 in April, up from $1,330.82 last month and up from $1,248.17 in April 2008.

Median rent for a 3 bedroom house in New Zealand was $310 per week, unchanged from last month’s $310 and down from last year’s $311 per week.

In April, it takes 23.1% of your after tax income as a first home buyer household to pay the median rent of a 3 bedroom house. This is down from last month’s 23.3% and down from last year’s 24.9%

Home loan affordability (HLA)

HLA measures of the percentage of after tax income needed to service the mortgage of a lower quartile house bought in April.

Factors that determine this figure includes house price, interest rate and income.

In April, a 2 year fixed mortgage rate of 6.24% and a lower-quartile house price of $245,500 will require a weekly mortgage payment of $308.80. This is up from last month’s $298.79 and down from the $419.07 that was required the same month last year.

This is equivalent of 23.0% of the after tax income of a first buyer household income. This is down significantly from last year’s 33.6%.

Full regional reports are available below:
- New Zealand (159kb .pdf)
- Northland (159kb .pdf)
- Auckland (159kb .pdf)
- Waikato and Bay of Plenty (159kb .pdf)
- Hawkes Bay and Gisborne (159kb .pdf)
- Taranaki (159kb .pdf)
- Manawatu and Wanganui(159kb .pdf)
- Wellington (159kb .pdf)
- Nelson and Marlborough (159kb .pdf)
- Canterbury (156kb .pdf)
- Central Otago Lakes (159kb .pdf)
- Otago (159kb .pdf)
- Southland (159kb .pdf)

Note to Editors
This work must be referred to as the rent-or-buy. It has been produced by www.interest.co.nz. Please direct queries via email to info@interest.co.nz, or see our contact information below.

Sources / Definitions / Methodology

*Targeted renter or buyer: An individual in the 25-29 year old age group that buys the lower-quartile priced house with a deposit as calculated below.

Interpreting this Index:
These affordability indexes measure the proportion a weekly median rent for a 3 bedroom house and a weekly mortgage payment is of weekly take-home pay. A separate measure is generated for each region, plus a national one, and for other various mortgage interest rate terms.

Household Weekly Income:
The source on which we base our estimates of weekly income, is now the LEEDS (Linked employer-employee data survey) data from Statistics New Zealand.

A household of one male and one female, both on full median incomes, is used.

Income tax rates from IRD are used to calculate a take-home pay (which is the LEEDS-based data net of the specific income tax rate).

Deposit - First home buyer index:
As house prices vary by region to a larger extent than wages, we refrained from using a simple 10% deposit-90% mortgage rule to emulate a first home buyer. Instead, to capture the disparity between incomes and house prices we estimate the deposit as a function of savings – that is 20% of weekly income saved for 4 years, plus interest earned at a 90 day deposit interest rate.

Home Loan: (Lower quartile house price less the deposit)
Mortgage repayments are based on the value of the home loan, paid weekly for 25 years, using the 2 year bank average interest rate. The home loan is assumed to be a standard table mortgage, where both interest and principal is repaid in a fixed weekly payment made in arrears. The repayment is calculated using the tools at www.interest.co.nz/calculator.

Mortgage Rates:
Average mortgage interest rates are sourced from www.interest.co.nz. These averages are for banks only as banks have 90%+ of the mortgage market. Affordability calculations are done for mortgages at the floating rate and one year through to the five fixed-rate terms. In this report, the two-year fixed mortgage interest rate is used. This is, and has been the most popular term. However, the market is shifting to longer term rates, and the index reviews allow for keeping track of affordability issues as this shift happens.

House price data:
Median house prices are as reported by the Real Estate Institute of New Zealand. Although the REINZ series is more volatile than the QV equivalent, there is a highly positive correlation between the two series. The REINZ series is more current and offers an earlier indication of market trends.

Saving Rates:
Average savings interest rates are sourced from www.interest.co.nz. These averages are for banks only, and use the 90 day term deposit rate. Saving calculations take into account the individuals marginal tax rates as defined by IRD.

Rents:
This study uses data sourced from the Department of Building & Housing tenancy bond service, focusing on median rents for a 3 bedroom house.

Disclaimer
IMPORTANT – PLEASE READ
No reader should rely on the contents of this report for making a specific investment or purchase decision. The information in this report is supplied strictly on the basis that only overall market trends are being reported on, and that all data, conclusions and opinions expressed are provisional and subject to revision.

If you are making a specific investment or purchase decision, you are strongly advised to seek independent advice from a qualified professional you trust.

The conditions and disclaimers set out at www.interest.co.nz/legaldisclaimer.asp are applicable to this report as well.

This report is made available on these terms only, and JDJL Limited or www.interest.co.nz is not responsible for any actions taken on the basis of information in this report, or for any error in or omission from this report.

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