Buying a home is about more than just money. The many intangibles that come from home ownership can’t be measured in dollars and they have a big impact on quality of life.
One of the biggest impacts of owning your own home is security. When you rent you are always at the mercy of the landlord. Rent could be raised, dodgy pipes may never be fixed, you might not be allowed a fur baby, or simply even be able to put pictures on the walls. You might be asked to move on and if you have children in schools, pets or you provide care for someone, that can be a monumental drama.
It’s more than just money
The decision to rent or buy is therefore often driven by much more than just financial reasons. It is usually about lifestyle and what it is that you want for the future. For some, raising a family in a secure location makes having their own home important.
If you rent, you’re handing over hundreds (sometimes thousands) of your hard-earned cash every month for nothing more than the privilege of having a roof over your head.
On the other hand, if you were to buy a house, your payments are going towards something you can call your own. You are accumulating equity as you pay down your mortgage on an asset that will very likely increase in value over the long term upon appreciation market value of your property.
If you have the deposit ready, is it always better to buy than to rent?
Well, according to Gareth Kiernan, chief forecaster at Infometrics, at present renting is the better option, financially. However, that is based on some pretty big assumptions. Let’s look at them.
Increase in equity
When trying to decide whether to buy a home, you need to take into account the increase in the value of the house over time. According to a recent research house prices have increased at an average rate of about 7% per year across New Zealand over the past 30 years.
The cost of interest
You also have to look at the cost of borrowing. Suppose your purchase price is $600,000. You have 20% deposits. The loan amount will be $480,000. So, let’s imagine a 7 per cent fixed interest rate for the entire 30 years of the loan. The total payment in 30 years including loan amount of $480,000 will be $1,149,120 or $ 736 a week. You paid only $429 per week as interest which is less than rent normally you pay in big cities like Auckland & Wellington.
Homeownership costs
Next, you need to factor in the not-insignificant costs of homeowning, such as insurance, rates and maintenance. Very roughly speaking, these are about 0.5% of the property value annually. It some cases, it can be less or more depending upon conditional of the property.
I think it’s fair to suggest that many of us would never miss a mortgage payment yet would struggle to invest that same money every week. And then some of us just can’t save money, ever. If it’s in our account and disposable, sometimes we just can’t help ourselves and we must spend it. So, a mortgage may in fact be a very good way to guarantee that you’re looking out for your future financial self. It’s a form of forced saving.
House prices on the downward turn
According to the Real Estate Institute figures, the national median house price in February 2023 was $762,000. This is the largest drop Trade Me has ever seen and prices are still dropping. And according to interest.co.nz, the homes most likely to appeal to first-home buyers around the country are those dropping in price the most.
Rents on the rise?
Also, according to the latest Trade Me Property data, Aotearoa’s national median weekly rent reached a record high of $600 in February while the number of rental listings nationwide dipped by 9 percent. Rents may look attractive now when compared to mortgages, but as Aseem Agarwal from Global Finance pointed out, “increased pressure in the rental market, and a continued shortage of rental stock will likely lead to increased rents”.
To rent or to buy now?
The current price falls have contributed to a more balanced market than we have seen for a few years. The choice of properties is greater and there is less competition for them from investors which gives buyers more time for due diligence and bargain. According to CoreLogic’s Head Of Research Nick Goodall, New Zealand has the highest number of listings seen for two or three years.
Many are predicting that interest rates will level out by mid-2023. Nick Goodall is picking; it could also lead to the current downturn in the housing market ending.
Sit on the fence wondering and wait a bit longer?
When we posed the rent or buy question to Aseem Agarwal, Head of Mortgages at Global Finance, he agreed that continuing to rent and waiting to buy could mean lower prices in a year. But he also said that advantage could well be offset by increased pressure in the marketplace as more buyers are looking. He also very correctly reminded us that when considering interest rates, the “decision when to buy is not governed by payments today, but by payments over a lifetime”.
Buying a place to make your own
Buying a home isn’t about making money. From an investment perspective, the market doesn’t matter if you are planning on living for a very long time. It’s also important that you are not paying off a mortgage when you retire in 30 years because most of the mortgages are paid off either ion 30 years or even before 30 years. However, if you are renting, then even after 30 years, you may be paying rent.
There is an emotional attachment when buying a home that varies greatly from person to person, but if you’ve weighed up the pros and cons of renting vs buying a home and it looks like property ownership will best support your goals, then get in touch with of the financial advisors at Global Finance, 09 2555500 or info@globalfinance.co.nz . We can discuss your options and look at when it makes the most sense for you to buy your own home.
The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.