Rent affordability a measure of income, debt, expenses and quality of life.

Rent affordability a measure of income, debt, expenses and quality of life.

By Amanda Morrall

With good reason there is a lot of doubt about official numbers lately be it Budget forecasts, inflated returns, IMF reports, Standard & Poor ratings or media reports regurgitating the figures and accepting them at face value.

As we enter a new economic reality caused by burst bubbles, geo-political power shifts, and policies that have proven either misguided or misalignment with public interests, it seems everything is suspect.

Unfortunately, I didn't really help this situation when I reported last week that rents were over-valued by 43%.

A big apology to readers on that front. I'll spare you the lengthy explanation behind the blunder. (Eds Mea culpa on my part too for not spotting the problem/Bernard)

Understandably, the article struck a nerve with readers who reacted in defence or else horror at suggestions renters were getting such a raw deal.

Going off the International Monetary Fund's report, which in actual fact related rents to housing prices, it would appear that rents aren't so extreme in New Zealand.

Whether you believe rental markets are over, under or fairly valued right now whilst important, neglects an equally if not more important part of the discussion on rent affordability; and that relates to wages which have long been recognized to be low. (Listen to this report by Radio National on the growing debate over increasing the minimum wage).

For a number of reasons, the markets are mercurial and it is incumbent on home owners or property investors servicing mortgages to build a better appreciation of the volatility.

Renters, particularly those hoping to get into the housing market, will do well to pay attention to those movements; however they'll be arguably better served by understanding the constraints of personal income to meet fortnightly obligations. (Check out our new buy or rent section which gives a break down by region)

(See also this article published in the New York Times on the narrowing gap between home buying and renting is narrowing.)

How much is too much?

There are no hard and fast rules on what percentage of income should be spent on rent as individual circumstances are unique. Income, debt, expenses, savings levels, family ties and community features all feed into the equation.

As a general guide, some suggest no more than 30% of gross income should be spent on housing including related expenses such as insurance, power, phone and maintenance. 

On that basis, there's not many who will be able to make the rent and live in house that isn't cold, leaky or a very long commute from work.

Median rents in New Zealand (for a three bedroom house) are running at NZ$320 a week right now not including related expenses. At 30% of the average New Zealand monthly earnings of NZ$3,988, you'd be looking a rental property of NZ$299 per week (before the additional costs of insurance, power and a phone line) to stay within budget.

On a more generous income to rent allowance of 36%, those on an average wage in New Zealand would come close to a break even point on rent provided they had low or no debt and not too many mouths to feed.

Gender gap in pay

Females living on their own could have a harder time of it.

Average monthly earnings for full-time working women in New Zealand are about 18% less than men, according to Statistics New Zealand. While the disparity has to do with different jobs occupied by the sexes, research suggest women are paid on average 90% of what a man earns for the same job. (See article by Australian lecturer Ben Spies-Butcher on gender inequities in pay and savings).

An allocation of 36% on rent on the average monthly average earnings of a woman (NZ$3,560 before tax) would roughly square up with an average rent of $320 per week but extras on top of that would blow the budget.

As reality seldom matches expectation in life -- and in rental property aspirations --  what you can afford and what you get in return may be sadly out of alignment. That's where the 30% guide may go out the window. It could be that 40% of income on rent (if other spending sacrifices are possible) will provide a better quality of life, for what that's worth.

Debt and financial goals also factor into that equation.

Getting rid of debt, saving for a holiday, a deposit on a house or some other goal could mean that income to rent should be lower than 30% although any lower and I imagine you'll be flatting with college students or living at home.

So is the grass any greener in Australia?

According to the New Zealand Institute of Economic Research, on the basis of disposal income, it's a hands down victory for Australia.

The think tank calculates that average weekly wages are 40% higher. (See more on NZIER's analysis here).

(To calculate relative after tax incomes in New Zealand and Australia click here.)

So how does that stack up compared to rents? Obviously, it depends on where you're living in Australia and a pile of other factors, both monetary and non-monetary.

For example, in Brisbane City, average rents for a three bedroom home are A$390 per week, the Sunshine Coast A$370 and Perth A$380. (See weekly median rents in Australia here)

Given that average wage in Australia is  (according to the most recent data available) A$1,380.80 (gross) weekly rents were seem to have a more comfortable margin for paying the bills as well. This means rents cost around 28% of income in Australia. (For more detail on wages in Australia see the Australia Bureau of Statistics)

At the end of the month, where that all leaves you comes down to personal choice, income, debt levels and lifestyle. On all those accounts average probably doesn't exist.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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4 Comments

Don't sweat the mistake in the other article. Your correction in it was good enough. Stuff happens. I'm glad I have my own house. It was horrid when we bought it and it took a lot of our income to fix up but I love it.

Are you able to compare average rent to average income for the main cities?

Seems like you have done the research and already have the figures?

- would be good to see that comparison

Syd Melb Bris Perth Auck Wgtn perhaps.

Re being greener in Australia, there's a number of factors to consider on this question. It isn't just "I will earn more so I can buy more, or rent in a better place."

One consideration is salary and what it can buy you over there. The cost of housing in Melbourne and Sydney is quite high in terms of value for money (price alone doesn't begin to reflect it) and so long term house purchasing is another factor. Brisbane and Adelaide are not as bad, but Perth is increasingly expensive to live.
 

Re salary itself, don't forget:

1. Many people overlook the differences with the Australian tax brackets which may influence the way you think. Put the income into the ATO tax calculator just to make sure your after tax earnings are realistic. (Bearing in mind the pay may be ca. 20% more in many jobs).
2. You will also, above $50k, certainly have to get private health insurance to avoid the medicare surcharge so factor that in monthly.
3. The salaries in Australia are variably advertised with and without super. So if the full salary is $130k including benefits, then 9% will go into your super fund. That's excellent and prudent saving, but that's 9% less in the hand than you think you might have to buy your house.
 

Certainly not wanting to put anyone off - I work trans-Tasman - but hope that helps 'apples with apples' on the income.

Thank you for this very informative and reliable post. Every now and then, some people will notice an article on some website someplace about a “rent-or-buy” showdown. Usually, it's a crock of manure, as much of the press appears to have been bought off by the financial industry, but from time to time, somebody gets it correct. If you need help paying your rent this month, you can get an installment loan.