Rent or Buy? We say, rent for now

Property

We have changed our opinion about the rent-or-buy equation; market froth and regulatory intervention looms

25th Oct 13, 9:07am by David Chaston

This month we have changed our view.

On a national basis, we now think the circumstances have changed to where it is now probably better to stay renting than buying, at least for the next year or so.

Each month, we update our monitoring of both home loan affordability and rent affordability, and publish the updates here.

For many months past, for most of the country, it has generally been close - that is +/-5%, and we had the view that on balance it was wise to buy. (There were exceptions, of course.)

The 'numbers' still show the same relatively close tracking, but the policy landscape is changing and that has changed our view.

The pressures in Auckland and Christchurch are changing how the public officials are likely to react. Those public officials include the policy makers in the RBNZ, the Government, and in some big Councils.

We have four reasons.

Firstly, the RBNZ is signalling that it will likely start raising mortgage rates next year on a fairly aggressive scale, rising by as much as 2.5% in the next cycle.

That would raise the interest rates from 5.75% to as much as 8.25% when the cycle is completed. Such a rise would take current mortgage payments up by at least $118/week, from $464/week to $582/week. (These figures assume no other changes over the cycle, which of course probably won't be the case.)

Secondly, the RBNZ has recently instituted its LVR 'speed limit' rules and these penalise borrowers with low equity. Banks have reacted by not only raising rates for low-equity home loans, but also imposing and raising their 'low equity' margins or fees, making buying without at least a 20% deposit even more expensive and financially stressful.

Thirdly, in most markets (Christchurch is the main exception), rents are not rising as fast as they once did and not as fast as mortgage payments are about to. Landlords may have to consider absorbing at least some of the fast-rising costs of building insurance and property rates. At least as a tenant you can negotiate these; as a home owner you are just a price taker.

And finally, the Government and Councils are making a concerted effort to get more median priced houses built. Those efforts are gaining pace. While they may find it a challenge to reach the targets they have set themselves, the fact is many more new and reasonably priced houses will be coming on to the market in the next few years, altering the supply-demand imbalance we have now. House price pressures are now more likely to wane, as are rental demand pressures.

Despite all this, you will need to make your own assessments and judgments on the likelihood of how future cost may affect you personally in the area you live, for both mortgage interest rates and rents. Landlords may come under pressure; if many more people stay renting, rents may rise faster than expected. Or, the RBNZ may not actually push ahead with its rates rises due to other big and presently unexpected economic influences. And the RBNZ has signalled its LVR restrictions may not be in place for very long - But what if they aren't reversed as they have implied?

And finally, in a year, there will be an election, and housing affordability will likely be an election issue. A change of government might change things too.

These are the reasons, and caveats, for our changed view. In general renters should hold off jumping into a frothy market when the risk of correction is high and the pressures on rising ownership costs are higher than for renting.

We think you should stay renting and act like a homeowner - that means you should save the additional amounts you would have spent (mainly on interest, rates and insurance) if you were a homeowner. (Remember, almost all your mortgage 'repayments' in the first few years are interest - very little pays down your loan and increases your equity. Use our calculator to check the numbers.)

True you may miss out on 'capital gains' but we (and others) think you are just as likely to miss out on capital losses the longer present market conditions build - and miss out on the coming regulator reactions.

It's just our general opinion though.

We encourage you to a) check the facts yourself, b) make up your own mind, at least as an interim opinion, and then c) check your personal situation with a professional adviser you trust.

Here are the September 'numbers' for first home buyers - lower quartile prices for a three bedroom house purchased or rented, and median household incomes for a couple aged 25-29 years, no children. Other scenarios will be different of course. The full details are here.

	House	Rent	Household	% household take-home pay
	LQ price	3br med	income	Buy	Rent	Differential
	$	$/week	$/week	%	%	%

Auckland North Shore	554,900	500	1,614	51.8%	31.0%	20.9%
Auckland West	430,600	402	1,466	43.5%	27.4%	16.1%
Auckland South	405,500	420	1,362	44.0%	30.8%	13.1%
Queenstown	367,500	380	1,356	41.1%	28.0%	13.0%
Auckland Central	476,100	530	1,567	45.0%	33.8%	11.2%
Wellington City	420,100	450	1,739	36.3%	25.9%	10.4%
Christchurch	341,600	420	1,438	35.5%	29.2%	6.3%
Kapiti Coast	302,500	350	1,351	32.0%	25.9%	6.1%
Porirua	288,875	340	1,447	29.0%	23.5%	5.5%
Tuaranga	275,000	340	1,325	30.4%	25.7%	4.8%
Hamilton	271,000	330	1,370	28.9%	24.1%	4.8%
New Plymouth	280,000	340	1,367	29.7%	24.9%	4.8%
Nelson	283,500	350	1,373	29.8%	25.5%	4.3%
New Zealand	375,000	350	1,456	27.2%	24.0%	3.2%
Palmerston North	225,750	295	1,478	21.6%	20.0%	1.6%
Wellington Hutt	255,700	351	1,490	24.6%	23.5%	1.1%
Napier	230,500	320	1,321	25.0%	24.2%	0.8%
Dunedin	215,000	290	1,262	23.7%	23.0%	0.7%
Timaru	203,375	280	1,308	21.3%	21.4%	-0.1%
Whangarei	206,000	300	1,465	19.9%	20.5%	-0.5%
Rotorua	190,000	275	1,364	19.3%	20.2%	-0.8%
Hastings	200,000	300	1,315	21.7%	22.8%	-1.1%
Wanganui	139,250	210	1,278	15.2%	16.4%	-1.2%
Invercargill	145,000	222	1,323	15.3%	16.8%	-1.5%
Gisborne	164,000	290	1,181	19.4%	24.6%	-5.2%

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.

31 Comments

by Machiavelli | 25th Oct 13, 10:44am 1382651068

Here’s my thinking. I’m approaching this from a machiavellian view point. The utilitarian ethos doesn’t come into it. Make no mistake New Zealand is a capitalist system. Let’s look at west Auckland. Even though it has the second highest differential on the list it’s a good “middle income” part of Auckland.

If you buy a house at $430,600 your costs are $630 p/wk or $32,760 p.a. If you rent your costs are $401 p/wk or $20,887 p.a. The difference is $11,873 p/a. Looks good to rent? But what if we add in capital gain? ($11,873/$430,600)x100=2.76%. As long as your property appreciates in value by 2.76% or more over the next year you are not worse off buying. If your property appreciates in value by more than 2.76% you are definitely better off buying.

Let’s extrapolate this out over ten years. If you bought you will have spent $118,730 more than if you rented.. ceteris paribus. In reality your rental costs will have risen but your home loan interest costs will have remained fairly constant, particularly if you lock in a reasonably low interest rate today for the next 5 years. The calculation to work out the differential: ($118,730/$430,600)x100 = 27.6%.

History tells us property prices generally double every ten years. Regardless, as long as your property value increases by more than 27.6% over the next ten years you are not worse off buying. In all likelihood, and I’m betting the family silver on it, the value of your property will have increased by a lot more than 27.6%. If history is any guide it will have increased by three times this amount. In which case you will be $237,460 worse off for choosing to rent rather than buy.

Rent or buy - you choose. But remember: The wise man does at once what the fool does finally.

by Zoltuger | 25th Oct 13, 11:32am 1382653930

What about insurance, repairs and rates? All those are included in a weekly rental figure.
What happens when your $630 per week is suddenly $820 per week as interest rates rise to 8.75%+ in two years time? Rent rises won't keep pace with interest rate hikes.
House prices generally double every ten years - but what if they don't? What if prices have peaked and don't rise at all over 10 years?

There's so much uncertainty at the moment - that's why David is suggesting renting is a good idea right now.

by Machiavelli | 25th Oct 13, 11:51am 1382655070

$430,600 at 5.74% on 30 year term = $579. That leaves $50 p/wk for insurance, repairs, rates. It's a bit light but not far off. Considering most people can get a lower rate, $630 p/wk is probably a fair estimate of actual cost.
This is why I recommend locking in a rate now for 5 years. Based on historic trends, in 5 years rates will probably have gone up and come down again.
Yes, yes what if house prices don't rise? What if they are the same or lower in ten years? What if the sun doesn't rise in the morning? It is a possibility. Indeed there is more than likely a world where this will happen. I do not believe ours is that world.

There is always a lot of uncertainty in life. If you are specualting on property to make money in the short term there is a real risk you will be caught out. House prices do go down (right before they go back up again!). If you are playing the long game I think time and inflation will take care of you.

by PSE | 25th Oct 13, 11:59am 1382655571

@ machiavelli, I think you are close but I disagree that historically house prices have doubled every 10 years (this is only true in recent times).

If it were true longer term it would mean that the average 100 year old house has increased by 2^10 times or 1024 times. Lets (conservatively underestimate) that the house cost the inflated equivalent of $80,000 (500 pounds) to build in 1913, that would put the house something above 80 million today - well above the average house price even in Auckland.

My feeling is that house prices must increase over the long term at something close to the rate of inflation, still the point stands that if the rent is the same as the interest you are onto a winner as inflation reduces your debt over time.

Houses are expensive but will they fall?? they have risen due to debt mainly but also immigration - government policy could change the attractiveness of borrowing so what the article says makes sense.

by kiwimm | 25th Oct 13, 2:16pm 1382663800

The prices in the Netherlands from 1628 to 2008 increased on average 0.1% per year above inflation http://hotelivory.wordpress.com/2010/08/29/a-very-long-view-on-house-prices/

Note that this includes the massive recent gains which once removed, return the price to 0% per year. Given that we are on a historic high now, the most likey outcome is a drop in prices in real terms (regression to the mean). The prediction is that it will happen but it does not say when. Feel free to take a punt with your own money. I will be doing everything I can to avoid bailing you out.

by Gummy Bear Hero | 25th Oct 13, 2:21pm 1382664112

PSE & yourself , best two comments I've read around here for a long time ...

... excellent link too , kiwimm

Cheers : Gummy

by kiwimm | 25th Oct 13, 2:44pm 1382665494

The house price graph is similar to the CAPE10 graph for shares. Assuming earnings and rent match inflation (ignoring short-term fluctuations) then the graph above is the equivalent of a PE graph for housing. Would you buy a long-established share with a PE of 30 i.e. twice the long-run average of 15?

by Gummy Bear Hero | 25th Oct 13, 2:58pm 1382666283

... ummm , you mean 'like Meridian Energy ( PE 21 ) .... nah ... not such a bargain , is it !

by Christov | 26th Oct 13, 1:07pm 1382746048

Yup PSE ...nice summation for sure, and you too Kwimm...but Olly ain't gonna like it , nosireeebob ain't gonna like it at all .Big Daddy says Olly's the ultimate in logic, pishwah I say , it was Spock for sure .

Thinking of investing in the Property Market....? ask yourself what would Spock do, inevitabley logic and risk do not make for good bedfellows.

GBH...liked your spotting the other day on the Meridan PE, hmmm, but I figure to pick up some loose change on the punt and sell it back to Cunny ....not brilliant but better than languishing in the bank for them to lend to P.I.'s

Xero's a boiler, in need of some venting to produce actual steam , the wet stuff not the hot air ....and yet still they come..eh..?

by Gummy Bear Hero | 26th Oct 13, 1:55pm 1382748929

They're telling porkies about the Meridian dividend , Count ... claiming a 13.4 % gross return on the first installment ... except that they only have 40 to 80 % imputation credits available ...

... and they're paying more cash out than they're currently earning .... sucking on some of the fat in the balance sheet methinks ... that's a " sprat to catch a mackeral " if ever I saw one ..

If your stockbroker puts his hand in his pocket and buys some for his personal account , fine ... if not , tell him to off-load them onto some other sucker ...

The track record for IPO's creating wealth for investors is slimmer than the amount of daylight shining between Oprah's butt cheeks ..

by Christov | 26th Oct 13, 1:59pm 1382749145

Cheers GBH , it was never going to be a long put...and I think they'll be lining up at 1.75/1.80 and Merry Christmas, spam with gravy for all.

by Gummy Bear Hero | 26th Oct 13, 2:22pm 1382750557

The letters I P O stand for " It's Probably Overpriced " ...

.. 9 out of 10 IPO's lose money over two years !

The XERO's of the investing world are few and far between ...

.. and nothing that this government has to sell has the pizzazz of XERO , does it !

by Alter Ego | 25th Oct 13, 3:00pm 1382666400

The fix for the global finance fiasco was to inflate houses and stocks and shares again via QE and forced low interest rates, stealing from peter to pay paul and any other bar steward involved via the scam.

That this allowed 1% to profit and the others to take a loss, was neither here, nor there to those perpetrating the frauds, using fast computing and currency manipulations.

This was a sleight of hand and still is. A derivative of what went before.

Inflation was created, but so was the fractional reserve currencies to pay for the dream of owning a house and then putting it all into other weird derivatives, when the mug punters thought they had it made.

Then if it moves, tax it, skim a little off the top, the bottom, the middle.

Like the stock exchanges, and traffic lights red one day, green the next. All systems go.

How come.

Un-believable non-sense.

Yet most believe otherwise. They think you can bank on houses and stocks and shares, when it is the other way around.

by odessakiwi | 25th Oct 13, 2:55pm 1382666100

They have only doubled every 10 years since 1990 because interest rates have almost halved every 10 years since then, are you really going to rely on interest rates continuing to halve every 10 years from now on?

http://www.rbnz.govt.nz/statistics/key_graphs/mortgage_rates/

by Boatman | 25th Oct 13, 11:09am 1382652564

Agreed , especailly for new entrants to the game , renting right now is better than over-paying for something which is looking topped out.

UNLESS;-

1) You are sitting on a pile of cash , where the taxman is taking a 1/3 rd slice of your interest or dividends

2) You have sold up in Auckland and moving to the provinces where prices are still subdued

3) Sold up and retiring to the Coromadel or elsewhere , its not a good idea to be out of the market at 65 or older.

The market has run too far , and we dont actually know if the LTVR speedbumps will have the effect of slowing the market down

by Machiavelli | 25th Oct 13, 11:21am 1382653316

Boatman - would you forecast that property prices in west Auckland will not achieve a 27.6% increase in value over the next ten years?

by ngakonui gold | 25th Oct 13, 2:58pm 1382666331

Family member purchased bare section in Massey in 1964,added house total cost 4000 pound.

House sold this year $500k

I have no idea what percentage increases are but they look ok to me.

by MortgageBelt | 25th Oct 13, 11:34am 1382654055

It will be interesting if interest rates are hiked in March, 2014 as predicted. This would place NZ as the only country in the world raising rates. I guess if the "inflation" figure can be manipulated to look like 2.5 or 3% then the RBNZ can get the green light

Floating mortgages at 8.25% by 2014 year end is probably unlikely. We tried a small hike in 2010 & scorched off early green shoots pretty quickly.

The new normal for the OCR is likely to be 2 to 3.5% for the next 3 or 4 years.... So home-owners will be very unlikely to face steep hikes (unless the world miraculously recovers & NZ gets sone economic stimulation/widespread recovery [you'll need Labour for economic activity/stimulus])

by speckles | 25th Oct 13, 12:42pm 1382658131

The real situation where interst rates will materially increase is a credit event internationally or specfic to NZ...no sane person could discount either.

by SK | 25th Oct 13, 1:33pm 1382661206

Yes peasants - rent your way to a retirement of poverty.

by kiwimm | 25th Oct 13, 2:20pm 1382664014

Magistrate: The peasants, sir, they can't afford to buy a house

ScaryKantoinette (aka SK): Let them pay rent

I think you know what comes next

by SK | 26th Oct 13, 12:20pm 1382743239

Ha!

Very good 'let them pay rent' wish I'd thought of that.

Well I suppose next the peasants revolt and start sharpening the guillotine.

Most of them are quite revolting already.

ScaryKantoinette indeed.

by TimfromTaupo | 25th Oct 13, 2:54pm 1382666044

I thoroughly encourage my Tenants to continue renting.

by Chris_J | 25th Oct 13, 3:20pm 1382667621

If you can afford to buy a house it is almost always a good time to buy.

Doing some calculations on the second worst area $402 weekly rent on a $430,600 purchase price, buying with a 20% deposit could leave you $140,000 better off than if you rented and saved the surplus after just 10 years and that assumes no real increase in house prices (although CPI inflation is included).

For an investor, they would really need to be putting about 35-40% downpayment (from savings) to make the same property worthwhile as an investment - assuming no capital gains beyond inflation.

I will send David and Gareth the spreadsheet so that they can mull over the possibilities...

by BigDaddy | 26th Oct 13, 8:44am 1382730282

All the commentors here simply can't join the dots.

Therories and guess work are useless.

Logic is the only tool that cn be applied.

For the ultimate in logic read todays Olly Newland's article courtesy of the NZ Herald:

http://www.ollynewland.net.nz/category/news-articles/

by Colin Riden | 26th Oct 13, 9:53pm 1382777634

If you don't mind Big Daddy, I think I will pass on your recommendation.

by noponies | 26th Oct 13, 12:57pm 1382745471

Hopefully, this bill; http://www.stuff.co.nz/business/money/9322551/Healthy-Homes-Guarantee-bill-up-for-debate will get passed. Watch the Nats kick up a storm about it being 'too expensive' and a 'nanny state' invasion of the private right of rental speculators to get a public subsidy in the form of free health care for their sick tennants.

It's about time that standards for rental accomodation were in place. Too many 'investors' speculating on captial gains at the expense of their tennants wellbeing.

by MortgageBelt | 26th Oct 13, 1:35pm 1382747721

Bloomburg: We have needed QE & low interest rates for the last 4 years. Nothing has changed. We will still need more of the same.
Unless the Govt is relaxed about homeowners losing equity & even lower consumer activity.

by Carlos67 | 29th Oct 13, 11:00pm 1383040830

Sorry but its never a good time to rent. You cannot compare the weekly outgoings as rent is dead money. I purchased on the North Shore over 10 years ago and it was expensive even then. When I retire I will have a million dollar asset, if you retire and your still renting, chances are you will have nothing and I sure would not like to be paying $1000 a week to rent by 2020 ! You have to purchase what you can afford, even if it's an appartment and get on the ladder. It's very had work and you have to make lots of lifestyle sacrifices if your on the average wage like me but I can finally see the light at the end of the tunnel.

by steven | 29th Oct 13, 11:04pm 1383041049

risk, though with buying of a huge capital loss.

regards

by Alter Ego | 30th Oct 13, 9:18am 1383077905

Negative equity is a common complaint in UK and Europe.

And they have miniscule interest rates.

Will never happen here in New Zealand, cos they always inflate. Do the not.????

Ask any bank, why they like having mortgagee sales, it shows how well their customers are doing.

And why were dairy farms prevalent amongst them last week, but dissappeared, like a scalded cat, like their capital gains. Maybe their off farm investments are an overriding factor.

Ask any bank, why they do not own all property on the planet. Then rent it to everyone at a mere 5% return. Then they could keep all that monsterous capital gain for themselves.

Ask yourselves why you can buy an apartment or a house in America, South America, Europe for half the price here, but interest rates are so low as previously stated.

Ask yourself why they forced down the interest rates around the world, so their negative equity customers could pay off their mortgagees, rather than have mortgagee sales.

Ask yourselves why a 2% rise in interest rates would be unbearable by most having a mortgage.

Ask yourself what fractional banking is all about. Ask yourselves how trillions can be made from mere millions, now billions.

Ask yourselves why energy is being miss-sold, miss represented here in gods own.

Two sides to any argument.

Some negative.

Equity is what counts in the long run.

Even if politicians and bankers and so called economists collude, to brain wash all your grey matter away.

Ask Greenspan, what was he thinking.

Ask Detroit what were they thinking.

Ask yourselves why we are all digging bigger holes and not building more simpler houses for our leaders to live in.

Ask Dynamo magician, how does he do it.

Shhhh it's a secret.

I will tell you, for a mere 1%.