If you are renting now and saving for a down-payment on your own home, we show who should buy now, and who should stay renting-and-saving

If you are renting now and saving for a down-payment on your own home, we show who should buy now, and who should stay renting-and-saving
Is now a good time for renters to buy?

By David Chaston

On a financial basis, how does home ownership compare with renting?

This issue won't appeal to most people, but it is an important consideration for renters, especially those renters who are saving to buy a house.

Our home loan affordability measures are part of comparison, but in themselves not complete enough. That is because when you rent, you are essentially paying your landlord for your right to occupy including the cost of Rates, building insurance, and building maintenance. In some cases some utilities (such as water and wastewater) may also be included in some cities.

All these are separate costs for every homeowner, over an above the costs of servicing a mortgage.

For renters who aspire to own one day, there is always the question of when to buy. Should you save more or take the plunge now?

In actual fact, there is more to answering this question than just a financial comparison. Things like your family situation, other financial objectives, other personal objectives.

But if we just focus on the financial aspects, it is possible to compare the cash-flows between the two options.

We produce the Roost Rent-or-Buy report series for all regions and most urban areas.

These Reports track the figures for 25 to 29 year olds who are renting a 3 bedroom house and are thinking of buying a similar first-quartile home. We are assuming a 'couple' household of two incomes, and no children for this study.

We source take-home pay data from the IRD LEEDS series (Linked Employer Employee data series - essentially the data collected by the IRD via payroll deductions).

We source rent data from the giant DBH rental bond database.

And we compare this data to the Roost first-home buyer affodability detail and add the expenses of council Rates, house insurance, and maintenance.

With these comprehensive data sets, we compare the relationship between take-home pay and rent, and take-home pay and the adjusted house-buying data.

On a national basis, for most couples who are renters and potential first-home buyers, now is a good time to consider buying.

  House prices Median --------- Affordability ---------
October 2012 lower quartile rent/wk Buy Rent Diff.
  $ $ % % %
New Zealand 262,000 337 25.4 23.3 +2.0

It is not a slam dunk - more of a close-run thing.

The costs are similar between the two options, but interest rates are low and likely to stay low for some time.

But 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, on an overall (national) basis, if you are buying a first-quartile house, you need to have saved $52,400.

However, in some centres, it is clear you should keep saving rather than buying now.

  House prices Median --------- Affordability ---------
October 2012 lower quartile rent/wk Buy Rent Diff.
  $ $ % % %
Auckland North Shore 505,000 470 46.3 29.2 +17.1
Queenstown 377,000 402 41.3 30.0 +11.3
Auckland West 359,200 390 35.5 26.7 +8.3
Wellington City 417,300 460 35.0 26.4 +8.6
Auckland South 365,400 410 38.8 30.2 +8.6
Auckland Central 441,000 520 40.9 33.3 +7.6
Christchurch 311,800 370 31.7 26.4 +5.3

That is true in all of Auckland's zones (North Shore, West Auckland, South Auckland, and the Central isthmus area), in Wellington City, in Christchurch, and in Queenstown.

In all these areas, it is at least 5% more expensive to own than rent - and in Queenstown and Auckland's North Shore it is more than 10% more expensive. That is a big premium to pay and we think it would be better to salt it away in your down-payment fund.

At the other end of the scale, it is clearly a great time to buy in Hastings. If you have a deposit, don't wait - get out there and buy because you will be paying about 7.5% less than paying rent (if you are in a median situation with both your income and your housing choices).

  House prices Median --------- Affordability ---------
October 2012 lower quartile rent/wk Buy Rent Diff.
  $ $ % % %
Hastings 151,250 320 16.8 24.4 - 7.7

For everyone else, its is close to a toss-up. A lot will depend on your own personal situation of course, and a good mortgage broker can help you with that.

The individual Reports for each urban centre are here »

-----------------------------------------------------------------------------------------------------
Mortgage choices involve making a significant financial decision so it often pays to get professional advice. A Roost mortgage broker can be contacted by following this link »
-----------------------------------------------------------------------------------------------------

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

32 Comments

Driving thru hamilton this morning i came across a house being advertised for rent at $290 per week.
this is a house that 2 years ago they couldn't find a buyer for at 210k.
IT is a hole in a crappy area but nodoubt wff or rent subsidies will allow the owner to profit
 

Hi there David, in your auckland south row:

Auckland South

365,400

410

28.8

30.2

+8.6

it looks like it is cheaper to buy than rent, but you have a +8.6% difference there.

I'm guessing it's a typo and it's meant to be "38.8", not "28.8".

What happens when this two income no kids family decides to become one income and one+ kids family?
 
In countries which have had higher prices for longer, they average age of new mothers is increasing. In the UK, it is now above 29 and in Japan it is 30. The number of children per family is also dropping with record numbers with no children.
 
What is the generally accepted measure for affordability? 30% of your income. Compare this to the buy percentages above (particularly AKL).

Ha , I just read the headline David C...couldn't help but chuckle...!
 Two young couples,(family of friends)  one with two children , the other with one, decided to sell while they could get the huge bucks for their respective properties last year both in Onehunga /Greenlane-ish area, .....both renting now as they can't find suitable property of similar attributes for the buget they set...guess where....?
In the very houses they sold...!...now that is freaky, I knew about one for a while ,but just found out about the other last night telling a friend over dinner about the first young couple and he said ...cop this..!
 So the answer might be sell to rent.....nah..!

I like their thinking. Cash in the capital gains then let it on a long-term contract from the new landlord and let them take the risk during the bubble years. When it crashes, buy it back at a discount and as you are the new owner it is easy to break the tenancy :)
 
As you are selling with a guaranteed long-term tenant, you should be able to get a better price for it as there is less risk to the new owner (of bad tenants or voids) therefore they should accept a lower yield. Could even get first right to buy written into the contract.

I can simplify this for everyone:
Wealthy people own land.
Very weathy people own lots of land.
End of story.

But they dont have debt.

Barry Hart still owns all that land doesn't he? He must be pretty wealthy

You must not know any then.
Heres another tip for Friday:
Buy quality property and keep it. Keep it means do not sell it.
Dont be the person who tries to trade in and out trying to pick peaks and troughs.
That is a mugs game.

That is in effect a historical view though...and buying at the top of a bubble doesnt seem wise.
regards

Buy quality property and keep it long term.
Wheres the difficult part?

Only if you buy without going into debt as AndrewJ points out above. See your position is fundamentally flawed, it isn't the ownership of land that is a store of wealth but the control of land. I subtle but significant difference for it is what land produces that is really where the wealth lies. If your land is mortgaged then you don't have control.

I see no consideration for being liquid or appreciation/calculation of risk...surely this proposal is purely short term.....ie this month its cheaper to rent in Hastings...doesnt strike me as a 25 or 30 year plan.
regards

ie Hastings has no quality property - that is worth buying and/or holding onto.
Bob Jones is buying up in Takapuna. Could be interesting.
 

If the bank says yes then you buy. You keep unless you can't. Then you repeat until you can't

David, you forget inflation in these calculations.
 
It's a huge consideration.  A 50 year old renter today has to consider that if they had bought a house when they were 25, that they would be basing their outgoings on 1987 rents!
 
This is the most important reason why home ownership works.
 
eg:
Imagine a person looking at a $250,000 house with equivalent rent $300pw.  House has $3100PA expenses (initially).  They have 10% deposit. Inflation is 2.25%PA. They pay $1500 purchase expenses.  They are able to make $500pw payments towards mortgage and expenses or towards rent and savings (which you increase at the rate of inflation).  Should our person rent or buy?
 
Assume they can get current 5 year fixed rates, and that real interest rates remain roughly where they have been for the past 100 years (about 4.5%PA plus the rate of inflation - current rates are a bit below this).
 
Then our person would be:
 
After 2 years better off by $9,976.
After 5 years better off by $32,900
After 10 years better off by $91,969
After 12 years you are mortgage free.  Assuming house prices have not increased or decreased in real terms, your house is worth $326,500.  The saver has $197,700 in their account (still not enough to buy mortgage free!).
 
Given the renter still needs to make rent payments but the owner only needs to make maintenance/rates/insurance payments then it takes just a further 10 years for the home owner to actually have more savings than the renter AND still own the house mortgage free (ie after 22 years the renter has $400,000 in savings, and the home buyer owns the home AND has $400,000 in savings. NB coincidentally this is about the same time as the renter can finally afford to buy mortgage free).
 
So after 30 years of doing the same thing:
The renter has $611,993 in savings, the homeowner has a home PLUS $887,289
 
Now assuming this started at age 25, then at retirement after 40 years:
 
The lifelong renter has $954,490, the homeowner has a mortgage free home worth $609,000 plus $1,817,572 in savings.
 
At retirement the renter still needs to pay rent, so staying in the same size home and assuming any Government super is needed for normal living expenses, then these savings will decline as rent is paid.
 
Using the savings JUST to pay rent will mean EVERY LAST CENT is gone at age 94.
 
Using the savings to pay rent PLUS top up living expenses at an equivalent of today's $500pw will mean that EVERY LAST CENT is gone at age 75 - less than 10 years of retirement with no big splash outs or medical costs!
 
The homeowner on the other hand would be able to draw out the equivalent of $500pw every week until the age of 95 (at which time it is $2373), a further 20 years than the renter AND at that point they will still own their home mortgage free (incidently worth $1,036,000 assuming no real rise or fall in prices).
 
Renting doesn't pay off.

Chris_J... along with SK, you make great sense. Well explained.
 

You are assuming that housing will continually outperform all other investment opportunities. That ain't necessarily so.

Of course all of this assumes stable employment.
Now look at the trends particularly amoung the youth. They increasingly cannot find work, why else would they be leaving the country in droves? You won't be locking yourself into a huge mortgage if employment is not stable as it limits your flexibility to move to find work.
All these calculations are worthless because of the assumptions upon which they rest.
Nobody has the first clue how the next 30yrs will play out, not sure a 30yr credit bubble of the past where interest rates have gone from 20% to 4% will be much of a guide. One thing is for sure the proportion of people owning their own home is in decline which will have implications on the political economy.

During the period of 20% interest rates CPI inflation was over 18% (1987), house price inflation was around 18% as well, ie real interest rates were actually a lot lower than now.  Average residential property was the best place to have your money at that time.

You are absolutely right Robby217, confidence around employment plays a massive role.  In my experience most people these days struggle to look ahead more than 2 years with any great certainty.  The only certainty beyond that is that things will probably have changed dramatically, and not always for the better.
 
Planning for a 25 or 30 year mortgage is just... impossible!  You just take it on and think "I'll worry about it if things go wrong later on...."
 
A number of years ago I was made redundant (out of the blue) - I pretty much immediately sold my house and cashed up, moved into a tiny, cheap little rental.  I didn't get back into my own property again for several years - why not?
 
Confidence around employment.  When I got that back (as much as you can have confidence in employment these days, anyway) I moved back into my own place. 
 
Given the state of NZ business right now, there will be a lot of people facing a dillemma around making that commitment to property.  Lots of pressure to invest and/or just buy that family home before prices boost even higher, yet lots of nervousness around the state of the economy. 

 
"Inflation" is an easy to use answer. We see this bandied about here all over the place when talking about houses.
However, "inflation"  does not take into account your earnings. I mean, what NZ has been experiencing over the last few years is goods inflation, but the same rate of salary/wage inflation.
When this happens it points a very different picture on the benefits of owning a house. Image all of your expenses go up significantly, but your earnings don't go up in at the same rate.  People get financially squeezed, and I'm guessing that's one of the reasons why we have such high mortgagee sales at present.

But rents have gone up in the last few years by quite a lot - so if you we're renting you would be worse off than if you had bought.

If you dont assess or care about the risk, yes.
Right now I see it very hard for renters to pay much more....that's a risk for the PIs as well...Olly says 100% gain, I have to wonder where the renter will get the $s.
regards

It makes no sense to consider the current costs only. If you rent your rent will increase for the rest of your life. So maybe in the first year you would be better off renting, but after 5 years it might be about equal, after 10 you would be better off owning and after 30 you would be much better off owning. Then if you take capital gains into account it makes owning a no brainier. 

this is a good tool for trying to do the impossble and predict how much better off you would be in the future...
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
 

Ive said it before and I'll say it again, my rent has not increased since 2008.

congratulations.
my residential property values have inflated by another 3.5% in last 3 months.
We're both happy then.
 

Lol pretty sure the interests that I have in property have gone up slightly more than that ;)

But maybe its just a sideways shift, or maybe they've just edged a little bit higher, who knows lol

ROFL exactly - but QV have spoken in their official capacity.
That will do for arguements sake.