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To rent or buy?; Rent ratios; house-to-income-multiples; cost calculators; virtual library

29th Nov 11, 10:44am by Amanda Morrall

To rent or buy that is the question

By Amanda Morrall

As a Aucklander who lives on the North Shore (and rather likes it), the question of whether it is better to rent or buy (given my present circumstances) is pretty straight forward. Gisborne on the other hand, or perhaps Dunedin put me in the buyer's market in terms of affordability.

Take a look at the graphic below and you'll see why.

This issue of Take Five draws on the rich real estate data that we've compiled here at interest.co.nz with a few external links to help other prospective home buyers survey the landscape.

Many thanks to our interest rate watcher Suhaimi for producing this goldmine.

#1 Rent or buy

According to the latest Household Economic Survey published by Statistics New Zealand the average renter is doing it hard. Since the last time the survey was done rents have risen 6.6% and the proportion of those paying more than 30% of their income on household income has jumped from 33.8% to 39.1%.

The proportion paying 40% or more has also increased however not so sharply.

Where you rent obviously makes a difference. So too do interest rates.

For many renters, buying now makes more sense than renting, in particular areas. Have a look at the regional break downs in our rent-or-buy section.

October 2011	Rent or Buy Affordability			Other ratios		House prices		Rental
	rent (%)	buy (%)	diff (%)	rent ratio	median multiples	median	lower quartile	median rent (p.w)
*renting is more affordable than buying*
Queenstown	27.6	40.9	13.3	24.6	6.6	475,000	352,000	372
Auckland North	29.1	41.8	12.7	24.0	6.6	580,302	434,100	465
Kapiti Coast	24.7	32.2	7.5	21.6	5.0	370,000	286,600	330
Tauranga	27.2	33.4	6.2	20.5	4.9	352,000	280,000	330
Christchurch	24.7	29.7	5.0	20.2	4.8	356,500	295,000	340

*buying is more affordable than renting*
Gisborne	25.0	20.0	-5.0	15.6	3.3	218,500	185,000	270
Rotorua	21.2	17.1	-4.1	15.6	2.9	215,000	166,000	265
Wanganui	16.6	12.5	-4.1	13.7	2.2	150,000	125,000	210
Invercargill	17.9	15.5	-2.4	17.3	3.0	207,000	140,300	230
Dunedin	22.4	21.0	-1.4	17.2	3.7	250,000	192,900	280

New Zealand	22.4	24.4	2.0	21.6	4.6	359,000	250,000	320

#2 Rent ratios

One of the benchmarks used to assess housing affordability is something called the rent ratios comparing the median house price to the annual house rent.

I just did a quick look up on our site and found that I'm paying NZ$4,000 a year above the median rent for a 3-bedroom house on the North Shore.

Time to move I guess. Wanted, nice three bedroom home for family of three plus dog and cat.

#3 House price to income multiples

Another measure of housing affordability commonly used is the house price to income multiple. It's defined as the ratio between the median house price and median annual household income, or the median multiple.

A median multiple of 3.0 times or less has come to be accepted as a good marker for housing affordability.

Have a look at our data here on house to price income multiples to gauge affordability in the area you'd like to live in. Looks like I should be moving to Rotorua.

#4 Calculators

How much can you afford? Not since Math30 in highschool have I enjoyed using calculators this much.

Here's a few to check out.

http://tcalc.timevalue.com/all-financial-calculators/mortgage-calculato…

http://www.theshapeofmoney.co.nz/general-resources/calculators/rent-ver…

http://www.consumer.org.nz/reports/mortgages/rent-or-buy

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

#5 Useful links

And finally some bed-time reading.

http://www.getrichslowly.org/blog/2010/01/27/does-renting-make-sense/

http://www.telegraph.co.uk/property/rentingproperty/8198613/Why-buy-whe…

http://gra.co.nz/BlogRetrieve.aspx?BlogID=2311&PostID=126423

http://www.businessweek.com/lifestyle/content/jun2010/bw2010063_142497…

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Please add your recommended reading suggestions to the comment thread below.

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33 Comments

by SK | 29th Nov 11, 10:59am 1322517575

I'd take Dunedin over the north shore any day - get down there!

by Amanda Morrall | 29th Nov 11, 11:27am 1322519220

I've heard it's very cool but also cccccold in winter. I've turned into a total whimp. Don't tell Canada, I'm no longer worthy...

by SK | 29th Nov 11, 12:12pm 1322521922

I do love it down there - but yes too cold thanks!

A lot of character and creativity - not too many motorways and shopping malls.

by hauraki | 29th Nov 11, 12:21pm 1322522497

"A median multiple of 3.0 times or less has come to be accepted as a good marker for housing affordability."

Is that even relevant any more?

How many people just want affordable houses?

What's the point of owning a poorly built house in an undesirable neighbourhood?

by amalgam | 29th Nov 11, 1:29pm 1322526567

What's wrong with the idea of the residential property market consisting of properly built houses at affordable prices (ie 3 x or less the mean)?

It's not that it can't be done. It's just that those who feel entitled to gouge massive profits don't want it to happen and won't allow it to happen.

by hauraki | 29th Nov 11, 1:44pm 1322527440

So it can be done but it won't happen. We just keep dreaming about 3 times the mean.

by bob | 29th Nov 11, 2:23pm 1322529780

Who are the "massive profit gougers" and how can it be done?

The average Auckland city house is $500k and average household income is $85,000. By your 3x idea it should be $255k.

Firstly take off $25K for council taxes (the profit gougers?) then $26K GST (more gouging?) leaves you with $174K.

You're looking at $1500/sqm for a properly built house (down to $1100/sqm for improperly built/not complete house) so you might get 130sqm of house - is there some gouging going on there you think? presumably builders/suppliers should be allowed to earn an average income too?

Then you're left with $0 for land. Is anyone that wants over $0 for a site also a "massive profit gouger"?

by Budgie | 29th Nov 11, 10:41pm 1322559688

It can be done by discouraging housing as an investment (eg. putting a captial gains tax or making it so only NZ residents can buy) so that overall demand for housing is reduced.

It can also be done by mortgage lenders requiring bigger deposits or shorter payment terms.

(Of course I'm not talking about building new houses here, but about buying existing ones)

by bob | 30th Nov 11, 1:12pm 1322611934

How does adding more tax help reduce the price of any component mentioned above? Housing, like food is a neccessity so overall demand will only be reduced by decreasing population or increasing house supply. Adding GST ti fruit and veges doesn't make them cheaper. The mantra that CGT will reduce house prices is nonsense (refer UK, Australia etc.)

by Budgie | 30th Nov 11, 2:06pm 1322615212

The idea is to reduce the size of the market that are looking to buy houses. The CGT could function to keep away the people who buy houses only as investments.

Like you say, housing is a necessity, so I don't like the fact that people looking to secure somewhere to live have to compete with investors that keep the market inflated.

"Overall demand will only be reduced by decreasing population or increasing house supply". Don't forget there's also the factor of how many people to a household, which has decreased greatly over the last few decades. If that trend reversed itself, the population could increase without needing more houses. I wonder how many empty nest boomer couples are living in 3 and 4 bedroom houses these days?

It's a misnomer that housing price increases are caused by the housing supply not keeping up with population. Here's an article by an Aussie economist explaining that (for the Aussie situation): http://www.debtdeflation.com/blogs/2011/05/02/house-prices-and-the-credit-impulse/

by Amanda Morrall | 29th Nov 11, 1:35pm 1322526900

If and when I do buy a house, I will be damn sure the place is covered in pink bats or something akin to insulation that works. I spent a year living in an orange crate for a house in chch. The air was so cold I could blow 'smoke rings' in my kitchen. Auckland feels down right tropical by comparison, even in the winter.

by Wolly | 29th Nov 11, 1:55pm 1322528159

Hebel Amanda...go the Hebel way!

by Amanda Morrall | 30th Nov 11, 7:24am 1322591073

Heck, never even heard of the place. Does that mean we'd be neighbors Wolly?

by Wolly | 30th Nov 11, 7:33am 1322591592

Google it Amanda.....you spoke of insulation...Hebel is what you want....not in a flood prone location ok...high and dry is it.....next best is straw bales...same comment re floods.

Otherwise for an old house....go the injected foam way....drill and squirt !!!

by Amanda Morrall | 30th Nov 11, 8:25am 1322594700

Can't find it. Directionally challenged even with Google, Hebel Supercrete products keep coming up. Send me a link...I like straw and bamboo, more sustainable.

by bob | 30th Nov 11, 1:23pm 1322612612

Injecting foam is a good way to trap water and prevent the old house drying out so it can rot quicker. It also shrinks away from edges leaving nice big uninsulated areas so you can stay cool while it rots.

For an old house you really need to strip off internal linings (or external) building paper it and polyester insulation or similar - wouldn't use fibreglass batts in my own house as apparently slump and not healthy.

by steven | 30th Nov 11, 1:59pm 1322614784

drilling foam has a rep of rotting the building paper as damp cant escape....but its cheap....

Im (slowly) installing 100mm pink bats and 100mm eps as I do up rooms....former from inside, latter from outside....not cheap but DIY is fairly cost effective......

regards

by Matt in Auck | 29th Nov 11, 11:12pm 1322561540

Come to Adelaide Amanda, cost of living much lower than auck and the weather is awesome

by doublegz | 30th Nov 11, 7:07am 1322590038

Auckland is voted 3rd spot in the Mercer 2011 Quality of Life Survey - taking out bronze for the fourth year in a row and earning the highest ranking in the Asia Pacific region. Across the Tasman, Sydney was Australia's highest ranked city coming in at 11, followed by Melbourne (18) and Perth (21). Adelaide nowhere LOL~

by Matt in Auck | 1st Dec 11, 1:28am 1322656111

You are an imbecile. Actually adelaide came in about number 30, its generally recognised that there is little separating the top 30-40 cities, and what do they measure? They clearly place little emphasis on weather or cost of living, judging by their top ten.
Also fyi adelaide came in as most liveable city in aus last year and was top 10 globally in one of the other liveable cities surveys (by The Economist i think)
adelaide / south australia does suck at sport mind you

by Matt in Auck | 1st Dec 11, 1:47am 1322657225

According to the economist adelaide is the 9th most liveable city, Auckland the tenth

by bob | 30th Nov 11, 1:26pm 1322612800

According to NY Times Auckland is hip (whatever that means):

http://www.nytimes.com/2011/11/18/business/global/hip-cities-that-think-about-how-they-work.html?pagewanted=all

by Frazcam | 29th Nov 11, 1:07pm 1322525223

Hmm....rent rises and people desperate for somewhere to rent - wasn't that mentioned when the government told everybody that they were taken depreciation off commerical and domestic property rentals? Landlords have got out of the market and the few that are left are fighting tenants off.

by SK | 29th Nov 11, 1:13pm 1322525636

Yes the rents are actually shooting up quite strongly lately.

Must be why the annecdotes of increased first home buyer activity are surfacing.

by amalgam | 29th Nov 11, 1:31pm 1322526694

Only in your fantasies.

Aside from a very few select areas, rents have been stable for a long time, and house buying activity remains flat.

Obviously, as a property spruiking real estate parasite, you don't like to accept such facts, but it doesn't change them.

by Amanda Morrall | 29th Nov 11, 1:38pm 1322527107

I like your use of alliteration but play nice amalgam or you'll get ousted from the virtual sandbox mate.:)

by SK | 29th Nov 11, 1:51pm 1322527885

Actually the facts are that this week I achieved 2 $30 a week rent increases.

I know that is a fact - because I was there!

by Budgie | 29th Nov 11, 10:35pm 1322559346

Take care with difference between an anecdote and data there, SK.

by SimonP | 29th Nov 11, 1:45pm 1322527557

You're most welcome to come down here to Rotorua to live Amanda. The housing costs are much more sensible, it beats spending $1 million on a dilapidated Grey Lynn villa. In these days of the distributed knowledge economy it really doesn't matter where you work from. I'm sure Bernard won't mind.

by Amanda Morrall | 30th Nov 11, 7:22am 1322590951

Bernards's not big on long distance relationships:) he thinks I will fritter away my time eating jet planes or indulging in three crantini lunches with my invisible friends.

by The best statu… | 29th Nov 11, 1:52pm 1322527933

I like to stay in my mortgage free house in Greenhithe, North Shore.

At least it is not cold in summer.

by SK | 29th Nov 11, 1:53pm 1322528016

Don't you mean $1 million dollars on a 'character do up' with 'loads of potential'?

(haha)

by SK | 29th Nov 11, 1:55pm 1322528116

Pretty dull in Greenhithe though eh?