Cheaper to Rent than Buy in New Zealand, Maybe

New Zealand’s house prices and interest rates are at their highest rates for years. Property Investors Federation vice-president Andrew King says

“a 25-year mortgage for 90 per cent of the cost of the country’s median-priced house, worth $345,000 last month, would currently cost a new home-buyer $745 a week, including rates, maintenance, insurance and an allowance for other costs. By contrast, the national median rent last month was only $305 a week.”

The devil is in the detail though. King’s figures are based on a 25 year mortgage, almost all mortgages written in the last few years are 30 years. He’s also assumed only a 10% deposit. That is low, most banks will add the extra costs on anyone borrowing more than 80% of the property’s value. King also assumes a floating mortgage rate of 10.95% - no one in their right mind would float their entire mortgage, especially now that the 2-year fixed rate has dropped to 9.2%, at that’s just an indication that interest rates are on their way back down, finally.

King’s argument that a first-home buyer could save more than $20,000 a year by continuing to rent and have an extra $100,000 for their deposit in five years. But would they: for many people are still financially naive enough to consider a mortgage to be a compulsory saving scheme: they are extremely unlikely to religiously save the different between a theoretical mortgage and their rent.

People who rent often tend to rent where they can’t afford to buy. That means the actual difference between rent and mortgage may be lot less than assumed in this example.

The real issue though with the comparison is that people don’t rent or buy their own home for purely economic arguments. People buy a house because they are tired of not being able to paint over the purple bedroom walls or build a raised veggie patch in the back yard. They buy so that they can have a dog and if their kids damage the walls playing rugby inside there is not an irate property manager to deal with.

People rent because they don’t want to be tied down, they don’t want to spend the weekends maintaing the garden and re-designing the kitchen.

At the moment though I wouldn’t rush into property investment in New Zealand - though there may well be good buying opportunities in the next few months.

Photo credit: ExtraMedium