Every so often I see a media article extolling the virtues of renting a home rather than buying one.
While the details differ, the broad thrust of the argument is always more or less the same: if you compare the cost of renting to the costs associated with owning a home (mortgage, rates, insurance, maintenance, etc) it’s cheaper to rent.
If you look at the question purely in terms of your circumstances today, the essence of that position is essentially correct.
If you were comparing the cost of buying a house today to the cost of renting one — and you ignore what happens to rent, over time, and what happens to house values, over time — you’re better off renting, in dollar terms.
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But the moment you factor the effect of time into your comparison, that position collapses and home ownership wins hands down.
Here’s why:
Capital Growth.
Over the past 40 years the median value of homes in Auckland has increased by roughly 70 to 100 per cent every 10 years.
This means that a home which cost $50,000 to buy in 1980 would be worth around $800,000 in 2019. The numbers aren’t exact and, as you’d expect, there are exceptions, but as a general rule, the principle is sound.
This is because of ‘the property cycle’, which can be observed to show that Kiwi property values increased for 5 or 6 years out of every 10 years in each of the decades between 1980 and now, and stayed flat for the other 4 or 5 years in each of those decades.
Right now in Auckland we’re in the flat part of the property cycle — and heading into it in other parts of the country — but the expectation is that we’ll enter a new round of house price increases in the early 2020s.
There’s no guarantee that this will happen, but based on evidence of the past 40 years, you’d be brave to bet against it.
Fixed house price.
The cost of servicing a mortgage can change over time. Rates and insurance premiums can increase and interest can go up and down.
But the price you paid for that house is ‘fixed’ from the day you take possession of it.
Assuming you bought the house in my example above for $50,000 in 1980, that’s what you would repay (plus interest) over the life of your mortgage, even though the house itself had increased in value to $800,000 by 2019.
Cost of renting.
Sadly, the story for a renter, over the same period, is not so good. The median cost of renting a 1-2 bedroom home in New Zealand has trebled from around $130 in 1999 to $390 today. For a 3-4 bedroom home it’s an increase from $175 in 1999 to $525 today. Regular rent increases are a reality and there’s no reason to believe this will change, so while your income might increase over time, so will your accommodation costs.
The power of equity.
As the value of your home increases you have the ability to use that additional ‘equity’ to fund the things that are important to you, at a much lower interest rate than other forms of credit.
The only way in which a renter can achieve these things is to save up, or to borrow at much higher interest rates.
Retirement.
Perhaps the primary advantage that a home owner has over a renter is by virtue of the freedom that owning a mortgage-free home provides in retirement.
Those who own a mortgage-free home typically eliminate between a third and half of their household expenses in their golden years, while those who rent are destined to keep paying for their accommodation for the remainder of their lives.
For all of these reasons, the short-term gain of saving a few dollars by renting rather than paying a mortgage is a momentary illusion. Over the lifetime of a New Zealander the advantages of buying are immeasurably greater and it should be the aspiration of every Kiwi to buy their own home.
- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for Oneroof.co.nz. Email him at [email protected]
