The Rent or Buy report for April 2015 - New Zealand
26 May 2015
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 March 2015
The national median house selling price has decreased to $455,000 in April from $475,000 last month. Annually, the growth is recorded at 5.3% against last year. Among major cities, Auckland has dominated the growth with an annual rise of 17.8%, followed by Christchurch.
Lower quartile houses, which are usually sought by the landlords and first-home buyers, decreased 4.5% annually to $303,000 at the national level. In Auckland, this category rose to 20.0%.
At the national level, median rents for a three-bedroom house are $360/week, unchanged from the level they were a year earlier.
Large scale rebuilding activities in Christchurch are the dominating factor that has 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 led investors looking at property in a new light.
The rent or buy results for April 2015
In April 2015, it takes 28.9% of a typical households take-home pay to service the mortgage and related household costs on a lower quartile priced house.
But it also takes 23.9% of household take-home pay to make the median rent on a 3 bedroom house.
That means in April 2015, it takes 4.9% 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 typical household 3.8 years (with a saving rate of 20%) to save a 20% deposit, as now required by most banks.
Key drivers in April 2015
The median weekly after tax income for a first-home buyer household in New Zealand was $1,504.30 in April, up from $1,502.95 last month and up from $1,480.76 in April 2014. (A first-home buyer household comprises one male and one female, both working full-time. They are both aged between 25 and 29 years old and have no children)
Median rent for a 3 bedroom house in New Zealand was $360 per week, unchanged from last month’s $360 and unchanged from last year’s $360 per week.
In April, it takes 23.9% 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 24.0% and down from last year’s 24.3%
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, income, rates, insurance and maintenance.
In April, two year fixed mortgage rate of 5.58% and a lower-quartile house price of $303,000 will require a weekly mortgage payment of $379.97. This is down from last month’s $380.60 and up from the $369.77 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 $62.19 per week.
This is equivalent of 28.9% of the after tax income of a first buyer household income. This is up from last year’s 29.0%.
On a national basis it is clearly less expensive to stay renting than to buy.
But with capital gains accelerating, and that trend building into areas out of Auckland and Christchurch, you might also think about whether you can save fast enough to keep up with the price rises. You will need to have a view about the likely track of house price gains.
In places like Christchurch that has a strong momentum of building new housing inventory, your view might be one of patience because the much greater supply about to come on to the market in the next few years will undoubtedly restrain price increases at the median level. It will also likely restrain rents.
The view is more difficult in Auckland. There is much talk about building more housing but little evidence yet that even the amounts being planned will be sufficient. Inadequate supply way into the future suggests fast rising prices, perhaps pushed along by strong migration.
The distortion of strong capital gains will push many into ‘buying now’ despite the stress of sharply higher weekly costs than renting. The risk is being “locked-out” in the intermediate term.
Auckland median rents are also showing some signs of starting to rise faster than median income growth which may also count against waiting to buy.
In most other regions, the view will be clearer with current consent and build rates being about at the demand levels. It is here that you may find it better to keep saving, although it will be region-specific.
If you are buying a first-quartile house, you need to have saved about $61,700.
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
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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.
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 this series used a 2 year fixed rate loan as the basis for interest rates. In September 2010 it was switched to the floating rate, reflecting actual market shifts by borrowers. In June 2014, it was switched back to the 2 year fixed rates, again reflecting market shifts.
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.
*In September 2013, REINZ advised that there were calculation errors in some first-quartile house prices supplied over the past twelve to eighteen months. We are now using the updated and corrected data. Earlier published results may not be accurate on this aspect.
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.
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.
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.
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