18 Sep 2019

Housing affordability is a huge issue. Working out whether to jump onto the property ladder or continue renting can be a confusing decision.


It’s always so easy to get swayed by the opinion that renting far outweighs the costs associated with owning a home (mortgage, rates, insurance, maintenance etc).  And when you look at it just like that, yes it certainly is.  However, the moment you take into account the effect of time on either of these options – owning your own home becomes the real winner.

Here’s why: -

Rise in house prices over time
Having an asset that may increase in value over time is appealing. 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. 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 there are exceptions, but as a general rule, the principle is sound.

The ability to use the equity in your home
Home equity is the proportion of your home that you own. Provided that the value of your house is increasing, as you pay off your loan, your equity will also be increasing. You may then be able to use the equity to fund an investment such as an additional property or shares or a managed fund, 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.

The true cost of renting
If history is a past indicator, the cost of renting will steadily increase over the years due to inflation and rise in property prices. Depending on where you live, your mortgage repayments may initially be higher than the cost of renting, but over the life of the loan, the interest charged reduces as the principal is paid off.

Many people pay off their mortgage in less than 30 years. Sure they’ll still have costs for home maintenance and council rates, but they’ll be free of large monthly payments to live in their home. But if you choose a life of tenancy, you’ll always have rental payments. Once you hit retirement and your income is reduced, it may be difficult to find a large sum of money each month. You may also be less able to absorb rent increases.

Saving a few dollars by renting a home seems like a great idea at the outset.  But hindsight is 20/20 and over the lifetime of a New Zealander the advantages of buying are infinitely greater.  As Kiwi’s we should all want to own our own home.