The Rent or Buy report - New Zealand

24 May 2013

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

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

The purpose of this Report is to help you decide when to move from renting to owning. The indicators in here show whether you should continue to rent-and-save-for-a-deposit, or when the time is right to buy.

For many, the goal of owning your own home remains a powerful objective - one we support. But affordability issues can be 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.

However, this Report is aimed at renters who want to buy, and suggests when conditions are appropriate to make the move from renting to owning.

Market overview for April

Strong demand for residential properties in Auckland, Wellington, Christchurch and other cities has pushed the volume of sales to the highest level for the month since 2007. A total of 7,104 houses changed hands compared to 5,676 units in the same month last year and 4,987 units two years ago. The three metro areas accounted for almost two-thirds of this volume.

The national median house price has increased by 7.0% to $390,500 in April compared to the same month last year. Auckland has recorded a significant annual growth of 13.3% while Christchurch and Wellington recorded 11.0% and 5.1% annual increment, respectively.

Lower quartile house, which are usually sought by the landlords and first-home buyers, rose 6.2% annually to $273,000 at national level. In Auckland this category rose 14.3%. Christchurch and Wellington have recorded an annual increment of 8.3% and 3.5%, respectively.

In April 2013, weekly rents have also risen as fast as the house prices. At the national level, median rents for a three bedroom house were $345/week, 4.6% higher than they were a year earlier.

Christchurch has dominated the growth for renting the same profile house with which recorded an annual growth of 14.3%. The growth is then followed by Wellington with the annual surplus of 9.9% and 7.1% for Auckland region.

The global economic slowdown and the Christchurch earthquake were among the dominating factors that have changed the residential property landscape. But regulatory impediments also loom large, especially in Auckland.

Lower rates of return in alternate investments such as term deposits and bonds, along with the complete demise of the finance company industry, have investors looking at property in a new light. The lower interest rates behind these changes have certainly spiced up buyer interest.

The rent or buy results for April 2013

In April 2013, it takes 26.6% of household take-home pay to service the mortgage and related household costs on a lower quartile priced house.

But it also takes 23.5% of household take-home pay to make the median rent on a 3 bedroom house

That means in April 2012, it takes 3.1% more 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 3.6 years (with a saving rate of 20%) to save a 20% deposit, as now required by most banks.

Key drivers in April

Rent affordability

The median weekly after tax income for a first-home buyer household in New Zealand was $1,465.86 in April, up from $1,463.67 last month and up from $1,430.69 in April 2012.

Median rent for a 3 bedroom house in New Zealand was $345 per week, up from last month’s $340 and up from last year’s $330 per week.

In April, it takes 23.5% of your after tax income as a first home buyer household to pay the median rent of a 3 bedroom house. This is up from last month’s 23.2% and up from last year’s 23.1%.

Buying affordability

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

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

In April, a floating mortgage rate of 5.76% and a lower-quartile house price of $273,000 will require a weekly mortgage payment of $335.08. This is down from last month’s $345.25 and up from the $311.03 that was required the same month last year.

In addition to the mortgage payment, this analysis also includes the household costs of rates, insurance and maintenance, amounting to $55.45 per week.

This is equivalent of 26.6% of the after tax income of a first buyer household income. This is down from last year’s 25.1%.

Conclusion:

For many people who are renters and potential first-home buyers, now is a good time to consider buying. The costs are similar between the two options, but interest rates are low and likely to stay low for some time. It will not be the comparison between renting or buying that will be the main decision point however – it will be whether you have saved enough for a deposit. It is generally unwise to extend yourself excessively by buying with little equity.

Future market directions are uncertain, and if they turn against your circumstances, you can be wiped out financially. When the technical data shows little between the costs of renting or owning, you are probably best to spend some additional time saving to ensure you have a sensible equity buffer before you buy. In our book, that is buying with a 20% deposit. Besides, with that down-payment, banks will work hard to give you their best deal.

That means, if you are buying a first-quartile house, you need to have saved $54,600.

A short list of the regional rent or buy affordability comparison for April 2013

Full regional reports are available below: 

Here is a cool tool that helps you assess a range of factors.

Now, 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. In this report, the two-year fixed mortgage interest rate is used until August 2010. From September 2010 onward, this research has adopted a variable or floating interest rate as the market is shifted to a lower and cheaper rate on a floating basis.

Note to Editors

This work must be referred to as the interest.co.nz rent-or-buy Report. 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 on our Calculators section.

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 until August 2010. From September 2010 onward, this research has adopted a variable or floating interest rate as the market is shifted to a lower and cheaper rate on a floating basis.
 

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.

Rates, Insurance and Maintenance

These are costs paid by a landlord and included in rent. To ensure this Rent-or-Buy analysis is fair, we have assumed the following costs will be incurred by homeowners:-

Rates and insurance – The average rates and insurance costs are sourced from the Household Economic Survey published by Statistics New Zealand.

Maintenance – Based the average weekly property maintenance related expenses as sourced from Statistics New Zealand.

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 in our Terms and Conditions 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.

Contact

For more information, contact

David Chaston
Publisher,
www.interest.co.nz

JDJL Limited
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PO Box 47-756, Ponsonby
Auckland, New Zealand

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