Housing is always an incredibly hot topic, especially with our recent election.
It’s getting tougher and tougher for the young generation to own a home.
I’ve written an article on the subject before, but I thought it was about time to revisit and update with a few more pros and cons.
The Kiwi dream of the quarter acre is about as far away as it’s ever been. It’s fine if you want to move to the countryside, or to a place where house prices are actually falling, but for most of us that want to live in major cities, it’s really tough.
Us Kiwis love our houses. NZ tax laws have made owning houses very lucrative and consequently, a really high percentage of our household wealth is tied up in them.
Our parents generation did very well by buying houses in the 70s 80s and 90s. Back then, owning a house was far more achievable. You didn’t have to borrow 10x your annual income or more.
Housing supply simply hasn’t risen to keep up with housing demand
This is why you have Kiwis all up and down the country competing for the right to borrow hundreds of thousands of dollars and to be locked into a potentially crippling monthly mortgage payment for three decades.
The social narrative needs to change
Having a house is not the only way to grow wealth and be worth anything as a human being – despite what your auntie told you at your last family dinner when she heard you’re in your thirties and still renting.
Some stuff you’ve probably heard a million times:
- “People are always going to need houses.” Yeah that’s true, but they shouldn’t be falling over themselves to buy their own (and possibly become financially crippled) when they could just rent one and save up.
- “Houses will never be as cheap as they are now!” Housing markets can and do crash. There is nothing exceptional about New Zealand that makes it immune to a housing crash. I’m not saying I think the housing market will crash, but it can happen.
It doesn’t matter who you are
I know doctors and lawyers who have only barely managed to buy a house because their parents provided the deposit. If they’re struggling, with jobs like those, you don’t need much imagination to see how incredibly hard it is for the rest of us.
The pitfalls of buying
Friends of mine, after looking for months and months, finally managed to secure a house. It ended up costing them vast amounts more than they’d originally intended; they had just got to the point where they wanted a goddamn house and they wanted it now.
This got me thinking about something that gets often overlooked in the renting vs buying debate – the stress of debt. Having hundreds of thousands of dollars in debt is no joke, especially when your monthly mortgage payment is 40% or more of your household income. This leaves you very little breathing room if anything else goes wrong.
For example, if you take out a $500,000 mortgage and pay it off monthly over 30 years, you’re looking at a monthly payment of around $3k for that time period.
That’s $3,000 a month that isn’t going to landlords (“Renting is just paying someone else’s mortgage!”) but it is giving money to bankers, given that greater than 50% of that is interest.
Have you been wondering how you could afford a mortgage? Check out my mortgage calculator and have a play around with the numbers. It’s available to all my email subscribers.
You also have to consider paying rates, which can be stupid expensive depending on where you live – I’m looking at Auckland and the ever-rising rates. That’s not to mention house and contents insurance and any repairs or renovations including damages to the property.
When you’re actually buying a house, you also have to pay significant amounts for things like builders reports.
Many rentals also provide appliances whereas you’d be outrageously lucky if you bought a house with a complete set of whiteware! Purchasing your own appliances can really rack up the hundys. This doesn’t include the temptation to suddenly buy heaps of furniture for that spare bedroom and so on.
Buy it and stay put
Another consideration is mobility. When you own a house, that’s it – that’s where you live unless you decide to rent it out (and that’s another article for another day!).
You’re pretty much stuck in one spot, so travelling and moving on a whim is generally a thing of the past. Of course this isn’t necessarily a bad thing, especially if you’re having kids and want to stay in a good school zone or want to be close to family.
The benefits of buying
Not everybody wants to be able to move to Slovenia on a whim. Lots of people, myself included some time in the future, want to put down roots.
A house that you buy is a place for you and your future family – dogs, children, whatevs.
DIY ya heart out
The state of rental houses can be pretty appalling (thankfully insulation is now becoming a legal requirement) and as a tenant, you often just have to put up with it. When it’s your own house, you have free reign!
You don’t have to ask permission to do every little thing and if something isn’t right, you can change it (with permission from the council). Build a deck, knock through walls, cut down trees that are blocking all your sun, repaint the weird lime green living room.
I’m not particularly home-improvement inclined, but I know it frustrates my girlfriend that she can’t rampage through the house on a DIY bender.
Your most valuable asset
Having a house may not be immediate of monetary benefit to you, but it’s something that will be meaningful in the future.
If you can pay off your mortgage as quickly as possible, that brings you closer to the dream of living rent and mortgage free in your own home.
Houses have been a great store of wealth for Kiwis for decades, and there’s no reason to assume this will change anytime soon.
Also, the thing about a regular mortgage payment is that it forces you to save money. If you go the rent and save/invest route, you’re relying on having the self-discipline to save/invest that money every month. Not that easy when you don’t have anything holding you to your goal.
Okay so if you’re not buying or living with mum, you’re renting. Is that any better these days?
The problems with renting
The life of a renter is one of uncertainty. The owners could sell the property or decide to move in themselves. They could decide to knock it down or raise the rent higher than you can afford. My girlfriend and I have a cat and a dog; if we move from our current place I know how incredibly difficult it would be to find a landlord who will accept pets.
NZ needs better laws to protect tenants, but those aren’t going to happen overnight.
Living with problems
As a renter, you’re also often afraid to speak up about issues because of the threat of having to leave. How many people have lived with damp, mouldy houses that are practically falling down around them?
So many rental properties are uninsulated and unsanitary but people will just deal with it because finding something else is so difficult.
If repairs need doing, unless they’re making the house unlivable, it can often be very difficult to get your landlord to make repairs in a timely way. Many leaky, mouldy, broken properties (or appliances) are just left as is because landlords don’t want to cover the cost.
On the move
Something else to consider is constantly having to move house. There’s a cost involved, and it’s also generally a huge hassle.
The positive side to renting
I often hear that “renting is just throwing money away” This just isn’t true. When you pay your rent, you’re paying for the service of housing.
Covering the costs
Unless it’s willful damage, any repairs your house or chattels require are taken care of by the landlords.
Perfect example: Recently, all fired up by too many hours of Tekken, I attempted a dramatic, sweeping low kick at a jammed door. Unsurprisingly, the glass promptly shattered. Because we’re renting, this was sorted out at no cost to us (albeit many weeks later).
Once you factor in all the costs associated with owning, you can often rent for much cheaper. This obviously depends on where you live, but the national median in 2017 is $395/week.
If you’re curious about the market rent in your city, Tenancy Services can give you the lowdown
There’s support if you need it
Despite the instability of renting life, as a tenant, you are often protected from being taken advantage of by the Tenancy Tribunal. It can be a long process, but worth the trouble if there is an issue you’re not able to resolve.
Tenancy Services have some amazing resources and advice for renters and landlords, including downloadable forms and checklists.
What’s an alternative?
An alternative to taking out a massive mortgage in order to get on the ladder right now is to save and invest the excess money you would have otherwise had to put towards your mortgage payment.
Obviously, this involves renting or living with mum in the short term, but this isn’t necessarily a bad thing. It also gives you plenty of time to work out what it is you really want from a house and where you’d ideally like to live. The last thing you want to do is to rush into something that’s expensive and ends up being not right for you!
This just ain’t our style
The problem with this idea is that investing in the share market just isn’t in our social narrative; the same Aunty who decried you for renting would likely warn you that the stock market is too risky. As Kiwis, we just aren’t taught about how the stock market works and how regular people can grow their wealth with it.
It’s easy when you know how
As I’ve written about, there are relatively simple ways anyone can invest in the stock market and achieve a great return over the long run. In following this method, you can grow wealth without having to borrow hundreds of thousands of dollars.
By investing you’re much better diversified than if you own a house. If you put all your money (and then some) into a house in Lower Hutt, your whole net worth is completely at the mercy of the Lower Hutt housing market.
How do I make the decision?
Many people are struggling to get on the housing ladder. They might have been to what feels like hundreds of open homes and have left constantly dismayed when the house sells for far more than they could afford.
The decision between renting and buying is so much more than just a financial one, but you need to think carefully about the long-term effects of both options. Renting isn’t necessarily sustainable and stable, but your problems don’t disappear the moment you buy a house either.
If I was in this position, I’d look at doing the following to help me figure out what to do:
- Work out the true monthly costs of owning and renting. With working out the costs of owning a house, be sure to take into account rates and insurance.
- Work out what you could gain if you invested the money that would have gone towards a house payment.
- My Investment Value Calculator will do this for you.
This will give you a better idea of the kind of situation that might work best for you and your future plans. The rent/buy decision is a very personal one, not one you can answer with a simple formula.
How are you navigating the rent/buy dilemma in New Zealand? Would love to hear your thoughts.