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Rent Or Buy: What’s Cheaper?

Should we all aspire to buy our own homes? Long term, the benefits of owning your own home far outweigh renting, says property commentator Ashley Church.

11 October 2021

Every so often, I see a media article on the virtues of renting a home, rather than buying one. The details differ, but the broad thrust of the argument is always more or less the same. If you compare the cost of renting to the costs associated with owning a home, like the mortgage, rates, insurance, and maintenance, it’s cheaper to rent.

If you look at the question purely in terms of your circumstances today – yes, that position is correct. If you compare the cost of buying a house today to the cost of renting one, and you ignore what happens to rent and house values over time, you’re better off renting in dollar terms. The costs of owning a home would almost certainly be higher than the cost of renting a similar property. But when you step back and factor time into your comparison, that position collapses. Home ownership wins hands-down, because there are light-years of difference between what happens to renters and what happens to home-owners over a lifetime. Here are some of the reasons why.

Capital growth

Over 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 an Auckland home that cost NZ$50,000 to buy in 1980, would be worth around NZ$800,000 in 2019. The numbers aren’t exact and, as you’d expect, there are exceptions. Also, increases aren’t as dramatic in other parts of New Zealand – but as a general rule, the principle is sound.

This is because of the property cycle. This shows Kiwi property values increased for five or six years out of every 10 years in each of the decades between 1980 and now. They stayed flat for the other four or five years in each of those decades. We’re now in the flat part of the property cycle in Auckland – and heading into it in other parts of the country – but the expectation is that we’ll enter a new round of house price increases in the early 2020s. To be fair, there’s no guarantee this will happen. But based on the evidence we can see over the past 40 years, you’d be brave to bet against it.

A fixed house price

The cost of paying back a mortgage can change over time. Rates and insurance premiums can increase – and interest rates can go up and down. But the price you paid for that house is ‘fixed’ from the day you take possession of it. Assuming you bought the house in my example for NZ$50,000 in 1980 – that’s what you would repay, plus interest, over the life of your mortgage. That’s even though the house itself had increased in value to NZ$800,000 by 2019.

The cost of renting

Sadly, the story for a renter over the same period is not so good. The median cost of renting a three or four-bedroom home has increased from NZ$175 in 1999 to NZ$525 today. Regular rent increases are a reality of renting, and there’s no reason to believe this will change.

The power of equity

As the value of your home increases, over time this builds equity. You have the ability to use that additional ‘equity’ to fund the things that are important to you, at a much lower interest rate than other forms of credit. Many Kiwis use their equity to borrow to buy businesses, pay for holidays, fund their children’s education, buy ‘toys’ like cars and boats, and purchase baches and investment property. The only way a renter can achieve these things is to save up, or to borrow at much higher interest rates.

Freedom in retirement

Having a mortgage-free home in retirement can give you incredible freedom. Those who own a mortgage-free home typically slash between a third and a half of their household costs in their golden years. Those who rent are destined to keep paying for their accommodation for the rest of their lives, using money they could otherwise use to enjoy retirement. Paying hundreds of dollars each week in rent, when you may not have any income coming in, can make a big difference to your financial situation. The short-term gain of saving a few dollars by renting, rather than paying a mortgage, is a momentary illusion. Over the lifetime of a New Zealander, the advantages of buying are immeasurably greater. Every Kiwi should aspire to buy their own home as soon as possible.

Ashley Church is the former chief executive of the Property Institute of New Zealand and the Auckland Property Investors Association. He’s been a regular media commentator on property for more than 20 years and now writes on behalf of OneRoof.

Published 28 November 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.

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