Rent or buy? This is a question that has long confused young New Zealanders once they’ve moved out of home.
Before I get really into this, I should say that I’m not against buying houses. I plan on buying my own house someday! Owning your own home is awesome for many reasons, and it really can be a great investment.
However, buying a house may well be the biggest financial decision of your life – and the most important financial decision of your life shouldn’t be made based on what society wants you to do. It has to be the right decision for you.
“But Ryan I don’t want to be renting when I’m retired do I?” You probably don’t! And neither do I. But just because you’re deciding to rent now doesn’t mean you’re locked into renting for the rest of your life. It’s an absolutely reasonable idea to hold off on buying a house in your 20’s and early 30’s.
“Renting is just throwing money away…”
These days, ‘rent or buy?’ is pretty much a non-question, considering how hard it is for a lot of people to afford a deposit and mortgage payments, especially if you’re living someplace like Auckland.
If you’re not already a millionaire or a baby boomer, the housing market is pretty damn difficult to break into.
This housing crisis has created a lot of frustration and anger. Perhaps you’ve considered doing what Kim did, uprooting and moving from Auckland to Invercargill to afford a house. Or maybe you feel like Toby, who in his Pencilsword comic rages about being apparently stuck renting forever.
Not being able to get into the housing market sucks, but is renting as awful as it’s made out to be? Renting is painted as lighting money on fire when this just isn’t the case.
I remember hearing a middle-aged woman say “… and I told my daughter that she needs to get into the property market as soon as possible. Because if you’re renting, you’re just throwing money away” These kinds of empty statements have been repeated over and over until they’ve just become accepted as fact.
There’s also a crazy amount of social pressure on you to buy a house. Everyone is so sure that property is the be all and end all to gaining wealth – but is it?
We’ve all heard some variation of “It’s better to own your own house and be paying a mortgage than it is to be renting and paying someone else’s.”
Makes sense right? The money you pay towards renting isn’t going to leave you with anything at the end, whereas once your mortgage is paid off, you’ll have a great asset.
This is true, but it’s not the whole story. Renting is no more throwing money away than buying groceries or paying for transport. You’re paying for something very tangible and important when the rent money comes out of your account every week – you’re paying for the service of housing.
Now in a world where your housing costs when owning (mortgage + insurance, rates, etc.) were equal to or less than what your costs would be if you were renting, absolutely it’d be a great idea to own a house. Very often that’s not the case. As I’ll talk about later, the hidden costs of owning a home really add up.
“Once I’ve got a house, I won’t be wasting all my money on rent!”
Too often the hidden costs of owning a house aren’t talked about. Let’s say you’ve looked about at how much a mortgage will cost you and found that it’s less than what you’re currently paying in rent, and you’re thinking of buying a lovely three bedroom house.
You don’t want to end up with a lemon, so you better get a building report to make sure there aren’t any hidden defects. These differ in cost depending on the size of the property, but they ain’t cheap.
Mortgage lenders usually make it compulsory to get insurance, and anyway, you don’t want to be left with nothing if the house burns down do you? Get paying your provider!
Remember when you were so excited to get into a house of your own so you could do whatever you wanted? Well, that cuts both ways. If anything goes wrong with the place, it’s your responsibility to fix it. Enthusiastically building your own deck and managed to destroy some plumbing? Sorry, your problem now.
Oh man, the council charges rates as well? Better pay those.
You’ve no longer got appliances and furniture provided for you, better purchase all those as well.
These other costs on top of a mortgage payment can add up, often quickly tacking on another few hundred dollars or so a month.
“If my mortgage payment is going to be less than my rent payment I’m better off owning.”
If you’re young and looking for your first house, it’s likely your only option is a 30-year mortgage, which involves the smallest possible deposit and smaller payments over 30 years.
Your mortgage payments might be less than what your rent was, but in the long run, those small savings will wind up costing you thousands of dollars, thanks to interest. Most of your initial mortgage payments consist mostly of interest (going straight to the bank instead of paying off your house).
E.g., a $400k 30-year mortgage at 5% interest would cost $773k in total to pay off. That’s almost double what you originally borrowed!
If you pay off the same mortgage over 20 years instead, it’d only cost you $633k in total. You’d save $140k in interest payments.
This suggests to me that a 30-year mortgage isn’t the best financial decision, and I’m better off to wait and buy a house when I’ve saved up and can pay my mortgage off way faster. The potential drawbacks to this plan are if the housing market continues to increase at a drastic rate, you might find it hard to save enough to keep up.
If you take out a mortgage that you can barely afford to pay, you’re leaving yourself very open to something going wrong. If you (or your partner) loses their job, you might struggle to pay the monthly mortgage bill as all your savings would’ve gone into the deposit.
If the value of your house drops significantly, you might find yourself left with a mortgage that’s far more than the actual value of a house.
“Housing is the best investment, and it’s important to get into the property market as soon as possible.”
Housing is always talked about as being a great investment, and it can be. But there are significant drawbacks to housing as a form of investment (this is about buying a house to live in, not buying a house to rent out for the profit).
A house may eventually be a great investment; but houses are illiquid, meaning that they’re slow and expensive to sell. If you decide to uproot and move somewhere else, it can be very costly. Houses don’t provide you with any income on their own (unless you’re renting a room out), plus they cost to maintain.
When investing it’s very tempting to put too much weight into what has happened recently and assume that’s going to continue forever. It’s very hard to predict what will happen to housing prices in the short term and almost impossible in the long term! I’m no professional speculator of housing markets, but it seems clear that this crazy growth that’s been going on is sure to slow down eventually. You shouldn’t avoid buying a house for fear of a market crash, but at the same time, it’s worth being aware that houses can lose value.
Like I said, though, buying property definitely can be a great investment.
There’s always going to be a market for houses. Having a house means you have a forced savings plan because you’re spending all that money on your mortgage, whereas if you’re renting it’s so tempting just to spend that extra money. Having a house that you have to pay for means, you’re slowly growing your wealth. At the end of it, you’ll have a valuable asset.
So – how to approach the rent/buy decision in your 20’s?
If you can easily afford a mortgage payment and all those extra costs (Or even better if you can afford to pay more than your minimum monthly mortgage payments) then, by all means, go ahead and buy a house. They’re great.
However, if you would struggle to pay a mortgage, it’d probably be a better idea to rent and save/invest the excess money that would’ve had to go towards your mortgage and associated housing costs. Having the discipline to save and invest while renting can be incredibly tough, but it’s likely to have a bigger payoff further down the track than if you instantly buy a house the second you can slightly afford one.
Waiting to purchase a house does have a lot of advantages:
- You’re able to save up a bigger deposit for the ideal house
- Your income will be higher in the future so you’ll be better able to pay for your mortgage
- You remain mobile and untied down during your 20’s
You should run all the numbers before making the biggest financial decision of your life. It’s worth working out;
- What % of your household income would go to the mortgage and house related costs (be conservative with these)
- How much your mortgage will cost over the long run. Check out the sorted.org.nz mortgage calculator – it’ll estimate how much your mortgage would cost over different payback periods and different interest rates.
It’s not just a financial decision, though…
There are awesome benefits to owning a house that has nothing to do with money;
- You have a place of your own which you can raise a family in (or a family of dogs).
- You’re not at the mercy of landlords.
- You can do anything you want to the place – knock down those walls to your heart’s content; they’re all yours.
Not every decision in life is about the bottom line. Buying a house doesn’t have to be the best financial decision for it to be an excellent life choice.
However, if those big intangible benefits of owning a home aren’t really what’s important to you right now, perhaps owning a house isn’t the right decision. Despite what people say, there is no urgent need for you to buy a house as soon as possible.
If you want to buy a house, do it either because you’re confident that it’s a great financial decision, OR because the non-financial benefits are important enough to you to make a little struggle worthwhile. Do it because it’s your decision and nobody else’s.
Whatever your reason, make sure you run those numbers before making the biggest financial decision of your life!