“Rent money is dead money.”
“Are you STILL renting?”
“Why are you throwing your money away on someone else’s mortgage?”
Anyone who rents has likely felt the judgment, often from well-intentioned family or friends. Home ownership is encouraged, expected and part of the NZ dream. But is it for everyone? Will you regret it if you don’t buy a house? And is renting forever really so bad?
We’re going to compare the pros and cons of buying a home vs renting to arm you with the knowledge you need to make your own decision (no matter what Auntie so-and-so thinks).
Dollars and sense
First off, buying a home is about more than just money.
We all know that right now, property is generally expensive. The median house price in Dunedin is $600k, in Wellington it’s $900k, and it’s even higher in Auckland.
Beyond the dollars, deciding whether or not to buy a home is about your lifestyle and what it is that you want to do in the future. For some, the dream of raising a family in a secure location means having their own home is pretty important. For others who like to move around or live a little more freely, being tied to a home may not be the best investment.
Does it make sense for you to buy a home? Let’s dig in and sort it out.
Assess the pros & cons
Flexibility vs Security
Whether you give the pro column a tick for renting or owning on this point depends on if you value flexibility or security.
Flexibility comes with renting. Want to go travelling for a few years? Go right ahead. If you want to move, you can move. On the flip side of that, you’re at the mercy of your landlord who may decide to sell at any time, which could force you to move out of a much-loved space.
In that sense, owning your home can give you greater security. If you have kids, pets or provide care for someone, that security can give you peace of mind. But if you like to live a little more freely, that may be more security than you want. It’s not easy to just sell whenever you feel like it, and there are significant costs associated with selling.
Predictable vs Varied Expenses
Part of deciding if you can afford a mortgage is figuring out what your payments will be. But bear in mind that interest rates change, and when they increase that means your payments will increase (unless you have a fixed-term mortgage). Look at what your worst case scenario could be and see if it’s still affordable.
Also, owning a home takes a lot of maintenance. While some things can be planned ahead, you have to be prepared to deal with sudden repairs like a leaky roof or burst pipe. Or, you know, your child decides the house should be painted pink.
Renting obviously gets the tick for predictability - your rent can only increase at the end of your lease. As for maintenance, that’s someone else’s problem! Although you have to live with the situation until the landlord gets around to fixing it. (One of our BetterSaver staffers lived with a broken stove the landlord kept promising to fix until her flatmate made a poster illustrating how the girls really needed a stove and mailed it to him. You do what you have to do to get attention.) By the way, if you’re renting and want to know your rights read more here.
When it comes to money, most people prefer predictability. But if you plan carefully you’ll be able to afford the unexpected expenses that come with owning your home. It’s about knowing what you’re getting into and being prepared.
Equity vs No Equity
You’ve probably heard that owning a home is the better option because you earn equity. What does that even mean?
Equity represents how much of your home you actually own by taking into account the house value and your mortgage debt.
Here’s an example: let’s say you own a home and you owe $400,000 on your mortgage. The house has a current market value of $500,000. This would mean you have $100,000 of equity in the home.
Equity can be used as collateral to get a second mortgage, also known as a home equity loan. Some people borrow against their equity for home improvements, to pay off other debts with high interest rates, or to start a business.
Now if you’re renting, clearly you are not earning equity. However, because you don’t have the expense of running a house, you have more cash flow. And if you invest that cash flow you can set yourself up for a pretty solid financial future.
There’s a great example in this article in the NZ Herald. The author calculates renting for 30 years versus owning a home and comes to the conclusion that in that case, renting comes out $600,000 cheaper. That’s $20,000 a year!
At the end of 30 years, the homeowner will be sitting on an asset that is fully paid for and at worst has about $1.23 million in equity.
However if the renter invests their extra $20,000 in a diversified portfolio with a rate of return at the historic average of 9%, over 30 years they would have earned $2.7 million.
The moral of the story is that you don’t have to own a home to invest in your future. And you might come out better off if you rent and invest wisely.
Extra Costs of Home Ownership
There’s a few more things to consider when buying a home that don’t apply to renting:
- Expenses. Things like rates, trash, water, tree trimming, homeowners insurance, earthquake or flood insurance. If you purchase an apartment, you’ll have body corporate fees.
- Your time. There is always a project to do, from mowing the lawn to finding a plumber or repainting the house. Plus projects that add value to your home like kitchen renovations or upgrading your landscaping.
- Value can decrease. There’s no promise that your home will gain value. If a major employer leaves the area resulting in a decrease in population, the value of your home can decrease. If the neighborhood declines or there is a construction boom, you might lose value.
Making your decision
By now you’re probably getting a gut feeling for how important it is to you to own a home. If it’s been stressing you out, hopefully you’re feeling relieved that there are other options out there.
In our latest podcast Jade talked about the house price index. In the last 20 years, the house price index in NZ grew by 282%. So if you purchased a home for $100k 20 years ago, today it would be worth $282,000.
The NZX 50 (NZ’s stock market index) had an average annual growth of 7.16% during the same time. So if you had invested $100k 20 years ago, it would be worth $299,000.
Now the economics of the next twenty years could be different. This is just an example to show that no matter which option you chose, you would have come out about the same. The decision is totally up to you and there is no wrong answer as long as you do your research and know what you’re getting into.
Start with KiwiSaver
The most important thing is to put your money into a high quality asset that will give you returns, whether it’s a home, shares, or something else.
No matter whether you decide to go for a first home or start saving for retirement, BetterSaver can help you set up your KiwiSaver in the best way possible. It’s the easiest way to get started saving. You decide your goals and our team of experts will get you on track to smashing them. We’ll guide you in choosing the provider and fund that’s right for you.
There is a lot to digest when making such a big decision. To sum up, when deciding whether to purchase a home:
- Consider your lifestyle and whether owning a home or renting and investing is best suited to you.
- Remember that a house can be a great investment - but it’s not the only way to invest.
- Jot down a worst case scenario mortgage budget. Is it feasible for you?
- Look into your investment options. Sorting your KiwiSaver is a great first step and BetterSaver can help with that, plus there are a lot of other options out there.
- There’s no shame in renting - and you could come out better off financially.
- Talk to a financial advisor. They have an unbiased view of your finances and can give specific advice.
Above all, define your own success and ignore everyone’s misinformed advice - trust the experts and do what’s best for you.
Don’t forget to sign up for early access to the BetterSaver platform - you could be in to win $10,000 towards your KiwiSaver and you’ll get KiwiSaver advice at no upfront cost to help you kick-start your savings journey.