To buy or to rent – a perplexing question at the best of times, and as with most western societies we are conditioned largely to see home ownership as a logical path to passive investment. Whilst there is much to debate on the subject and mixed opinions, I was taken by the demonstration of balanced feedback presented on the NZ Herald website today in response to the article “Buying house – more than twice as dear as renting“.
The article quoted Property Investors Federation vice-president Andrew King with figures saying to buy the median house in NZ cost $745 per week as compared to the median rental price of $305 per week – on the face of it a bit of a no-brainer! However firstly isn’t this a clear case as “he would say that- wouldn’t he” as representing Property Investors.
However for me the most powerful element of this story is the clear demonstration of the collective The Wisdom of Crowds which is shown in the feedback comments on the Herald’s your “view section” – to provide a smattering of these comments:
Nigel Pinkerton from Lower Hutt:
With respect, F symonds is also not comparing apples with apples.
Say I took out a $400,000 mortgage and payed an average of 7.5% for the rest of my life, not reducing the loan’s value. Bear in mind that mortgage rates are currently at the top of their cycle.
I would be paying about $575 a week for the rest of my life, and by the time I retire $400,000 would not be a lot of money to pay off (prices and incomes keep increasing).
If I am renting, even at say $400 a week. This rent will keep increasing with the cost of everything else and in ten or twenty years time I may be paying $800-$1000 a week or more with nothing to show for it.
Generally, if you are covering more than 75% of your landlord’s interest payments, you are making them richer on paper (which they can cash in by selling up in the future). This applies even if you are not contributing to paying off the principle (book value) of the loan.
Shaun from Karori:
The quoted figures are misleading in the following ways.
1. Most home owners will be on fixed rates. In the worst case where a mortggage has recently been refixed, these rates will still be over 1% lower than the quoted floating interest rate of 10.4%. Many home owners will still be on fixed rates which are even lower.
2. The quoted mortgage repayments figures include repayment of capital – which means that over the term of the 25 years the 90% mortgage ($310,500) is completely repaid. This savings part of the mortgage needs to be taken out in order to compare like with like.
Taking these two factors into account and using an a current bank 3yr fixed term rate of 8.8%, gives an actual annual interest cost of $27324. This is around $7500 less per year ($150/week) than the quoted figures.
Still cheaper to rent, but lets be accurate in the figures so as to make the comparison valid.
ILNZ of Howick:
There is one major point missing here: rent increase every year, 7-12%? so it will possibly takes only 5- 6 years for your current rent to match your mortgage payment, and the rent still goes up in the years to come, but not your mortgage payment
If you do not own a house when you can afford it, then you will forever miss out.
And when you are old, say after 25 years, paying off your mortgage, you have a house that worth a fortune by then, but not those renters.
KatieR of Point England:
Got reminded this week of the benefits of ownership. Renting in the current climate is great financially but terribly disruptive to your life. Theoretically you pay your rent and don’t have to pay another bill other than power and phone. In real life, I am hassled to pay water bills without notice and worry about lawns. I rent so I don’t have to worry about this crap.
In addition, I now only deal with property agents and will not rent from owners- and recently learned that this needs to be written in the tenancy agreement as some owners know this and have it managed by agents for the first two months then start doing it themselves. Agents are contactable 24 hours and get things done quickly. Owners expect me to put up with things not working for their convenience. I don’t pay rent to put up with a broken toilet and pay rent for my convenience.
I am thinking about buying next year as I am sick of the crap- six week evictions because their son is getting back from overseas, landlords visiting at all other than a six month property inspection (I am paying for privacy) and the terrible state of most rental properties – plumbing, electrics alarm and paint matter to tenants.
The key point here is that with the feedback mechanisms of blogs and the all pervading power of Google – so called experts need to be aware that people will seldom take their version of the truth at face value – people are encouraged and rewarded to dig a little deeper and hear the “wisdom of the crowd” before making up their mind.