Renting vs Buying

July 23rd, 2008 at 4:52 pm by David Farrar

Steve Pierson at The Standard takes issue with the statements from the Property Investors’ Federation that it is better to rent than buy. He notes:

First, it’s comparing the average rent to the cost of buying a median house. Rental properties tend to be lower quality, cheaper – so are likely on average to be worth well below the national median. Comparing apples with apples would look at the rent on properties of the same value.

This is a fair point. However would be useful to have some data on the average GV of rental properties compared to properties for sale to see how significant this is.

Secondly and most importantly, if you’re buying the house at the end of 25 years, you own a house. If you rent, at the end of 25 years you have nothing. That’s a pretty serious difference. If you buy rather than rent you might pay some more (less than the difference in the graphic though) but you end up with an asset in the end.

Now this is absolutely key. It is why I purchased back in 2001 – even though mortgage payments were way more than my old rental payments.

However does this asset compensate for the extra costs? Let us look at the graphic referred to:

Now I have not got the time to calculate inflation and interest adjustments so am going to do a simple linear calculation.  Over 25 years you will pay a total of $396,500 if you rent and $968,500 if you buy. So that extra $572,050 you pay renting is well in excess of the $345,000 value of the house.

Now again interest, inflation and changing house values will affect this equation. But the point is that the gap between buying and renting is now large enough to make buying significantly less attractive.

I am so glad I purchased in 2001. If I had waited a few more years, I would really struggle with being able to afford to buy.

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43 Responses to “Renting vs Buying”

  1. Bob (497 comments) says:

    You don’t want to go into retirement paying rent. You want to have your house paid off. Also you have no security renting. You can be turfed out usually at the worst possible time having to find another rental facing the cost of moving furniture. Owning your own home gives you control of your life.

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  2. Owen McShane (1,226 comments) says:

    Buying or renting depends on when you are buying and whether you are living in an economy which actively promotes housing bubbles, which is what we have been doing in NZ.

    “Planning-induced housing bubbles not only threaten individual families and local economies,” my friend the Antiplanner wrote in his book “The Best-Laid Plans, “they threaten the world economy.” Those threats are being realized today.

    While all kinds of reasons have been offered to explain the housing bubble, I still insist that growth-management planning was the initial cause. The evidence is the dogs that didn’t bark.

    The planners in NZ, as in Cal and Florida in the US have caused a housing bubble: steeply rising prices followed by a steep fall that has yet to reach bottom. If you chart home price data from the Office of Federal Housing Enterprise Oversight, you will find similar bubblepatterns throughout California, Florida, Hawaii, Oregon, Washington, and other states with growth-management planning.

    The dogs that didn’t bark have no bubble and no collapse: Atlanta, Dallas-Ft. Worth, and Houston. These cities don’t have growth-management planning.

    If no American cities had growth-management planning, there would have been no housing bubble. There would have been some subprime mortgage problems, but they would have been problems, not a world financial crisis.

    But because housing prices in California were rising with no end in sight, the money that fled the telecommunications and dot-com industries in 2001 went into real estate. This fed a bubble that had to eventually collapse. Now that money is going into petroleum, which pushed gas prices above $4 a gallon. If prices fall below $4 next fall, we will know that bubble is collapsing.

    So next time you fret about the high interest rates, the current recession, or even high fuel prices, thank an urban planner. They caused the housing bubble and they are responsible for the world’s current financial crisis.

    And go somewhere to buy a house where the market is not driven into such volatility but where housing prices rise at about the same rate as the growth in the productive sector.

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  3. Penelope (69 comments) says:

    Like you David, I’m glad I bought when I did, which was also in 2001. It was right at the end of the last property slump, I got my house for $40K less than GV, and even then, I was stretching my budget enormously. Now, however, there is absolutely no way I could afford my house if I were buying it now. Even with the recent slump, it’s still 100% more expensive.

    However, I learned an important lesson in the early 90s in London – negative equity most certainly does exist and I lost my house. It taught me that, when looking at a house you intend to live in, you should look at the price you are paying not as an investment, but as the cost of living in that house. Are you prepared to pay that price to live in that house? If the answer is yes, then you’ve got your money’s worth. If it’s no, but you’re expecting it to rise in value so it does become worthwhile, go find another house. Or rent!

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  4. Craig Ranapia (1,915 comments) says:

    The calculations you “don’t have time for” took me five minutes,

    Don’t you mean it took the Labour Party Parliamentary Research Unit five seconds to e-mail you the talking points, Rob? And if you could point me towards that “better analysis” at 08wire, I’d be chuffed because all I can see is a rather unedifying pissing match going on with Frogblog. Guess the Greens don’t like being lectured by Labour sockpuppets…

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  5. Penelope (69 comments) says:

    Looking at that analysis Rob, if you save the difference and earn absolutely no interest on it you come out with an asset of $512,000 in you bank account if you rent.

    Now add the interest and compound it. Then you’re comparing like with like.

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  6. Kimble (4,442 comments) says:

    Nobody has mentioned reinvestment. [And then they did :)] It is cheaper to pay rent instead of a mortgage on a week to week basis, but whether you should buy or rent will depend on the return you get on those savings. And this does not just mean bank deposits, shares or other securities. It could mean an investment in human capital. The return does not even need to be financial.

    Consider a family that is renting. The money they save by renting instead of buying pays for more extensive world travel for their children. The value of this experience for their children is subjective. So the difference in outcome between renting and buying for this family is ultimately subjective as well.

    When mortgages start costing much more than rent, the likelihood that the family would consider themselves “better off” increases.

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  7. jams (48 comments) says:

    I’ve been looking for a house with my partner for over a year now. We’ve done the sums and renting is cheaper by a long way, there just isn’t anything in our price range that is close to suitable. And I’m a supposed rich prick.

    To start with, we’re living in a house on Mt Victoria in Wellington. Rent is $420 a week. But the GV on this place is $750k, the place across the road sold a couple of weeks ago for $600k and there is another in the street on the market for $775K.

    We’ve saved up a $150K deposit which is herculean with the cost of living at the moment.

    If we were to buy the house we’re in for the GV, we’d be paying $960 a week in interest alone. That’s TWICE the amount we pay in rent. Don’t forget that if we bought we’d be paying an extra $50 a week in rates and have to pay for any maintenance ourselves.

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  8. virtualmark (1,536 comments) says:

    Sorry, but there’s some pretty lightweight economics going on here. I suspect the correct comparison is much more along the lines of comparing

    (a) paying $745 per week for 25 years to buy a house and ending up with an asset worth, say, $550,000 versus
    (b) paying $305 per week on rent and investing $440 per week, which over 25 years is $570,000 in contributions alone before you add in the returns on that invested money.

    But the true comparisons are complicated by the effect of inflation, changing interest rates etc etc.

    My own view is that the renting+investing option is probably the more “rational”, but that buying a home isn’t a strictly rational decision.

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  9. Monty (980 comments) says:

    Well I suppose I cannot complain – I have three houses and the increases have made me relatively asset rich –

    but i worry more about my children being able to afford a house – at present it takes about 7 x average income to buy an average house – and up to 100% of the average income to pay that mortgage depending on where the house is purchased.

    National fixing the RMA so more land can be made available will have a positive impact on home affordability – and then sorting out the consent process and a few other things as well will help. Labour have shown no intelligence in this area – but have rather tried to put a bandaid here or there but all they have succeeded in doiing is making homes even more unaffordable – they unfortuneley do not understand basic economics

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  10. grumpyoldhori (2,362 comments) says:

    David, A quick glance at that chart tells me that either rents are too low or properties versus average income are way over the top.

    A property with a value of $400, 000 ? with a return of 4.2 % , one would have to be mad to rely upon the rise in house prices to turn a
    profit.
    We could well blame our planners in this country and the government
    that sections are so expensive.
    They are only that expensive because of the damn sight more demand for sections than are available in the larger urban centres. and suburbs.

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  11. Simon Arnold (109 comments) says:

    First if you’d had a good liberal arts education David you would have learnt about log tables and compound interest would be easy using simple linear calculations.

    Second among other things this all assumes that the current relationships between rents and asset values are stable. They aren’t. When there is arbitrage available prices will move (and they are right now if you haven’t noticed) – although as others have noted distortions abound in this market.

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  12. Chicken Little (741 comments) says:

    but that buying a home isn’t a strictly rational decision.

    Give that man a chocolate fish.

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  13. dc (144 comments) says:

    Rob Salmond, are you really assuming rents are going to increase at 4% over the rate of inflation? That’s neither the long-run average nor realistic in the medium term (the CPI index for rents was about 3% p.a. from 1989-2007). Assuming inflation is unlikely to be much below 3%, that makes the total rent paid $396,500 in 2008 dollars.

    And as for property prices increasing at 2% over inflation for the next 25 years, don’t make me laugh. We have a price crash to get through first.

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  14. Anthony (798 comments) says:

    So is the Propery Investors’ Federation saying that investing in a rental property will give a poor return so is not worthwhile? Maybe it is saying it is worthwhile, but only because of the tax breaks that owner-occupiers don’t get? This is where I part company with Bill English and Rodney Hide who say there are not tax breaks. Poorly drafted tax law means there are tax breaks. Where else can one run a loss making business for years and claim deductions, and then get a tax free capital gain on sale (which, over the medium term is almost guaranteed) of that business?

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  15. dc (144 comments) says:

    They need to plug renting because there’s currently a big surplus of rental properties on the market, due to homeowners who have failed to sell renting their properties out instead. Rents are actually falling in some areas, and there are tales of major landlords going doorknocking to poach tenants from other landlords.

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  16. side show bob (3,660 comments) says:

    Virtualmark, good points but the danger lies in what you do with your money if you are not paying off the house. Yes renting may be cheaper but in what do you invest your money in given what is happening today. We had another company go belly up today with half a billion dollars in investor money in danger of going down the shitter. I would rather pay off the house, atleast when the rest of the world is crumbling before your eyes you still have that roof over your head.

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  17. Anthony (798 comments) says:

    Hey dc, what happened to BNZ economist dork Tony Alexander’s prediction of 7 percent rises in rent for the next five years!!

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  18. dc (144 comments) says:

    Anthony, it is going to suffer the same fate as his August 2007 prediction that house prices wouldn’t fall in the next two years.

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  19. thornster (1 comment) says:

    Duh.
    Renting vs buying is a decision that you make at the time – it is all very well to argue long term averages but the fact of the matter is that choosing to buy a house at the top of the largest property bubble we’ve seen in a long time
    AND when it looks like we’re headed for a recession
    AND when mortgage markets have seized up
    AND when house sales rates are running at 50% of the rate they were a year ago
    AND you can get 8+% return from bank term deposits
    AND when newspapers are reporting headlines like “30% yoy increase in houses for rent” (The Press last week)
    means that you’re a tard*.
    It is now blindingly obvious that the run up in house (and asset prices in general) was due to large amounts of credit on offer through securitisation; and the taps have more or less been turned off in this regard.

    *Or have an overriding concern that isn’t financial, eg for family reasons. In this case, you’re not a tard.

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  20. Anthony (798 comments) says:

    Yeah, I think he must get a backhander from the real estate industry.

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  21. uk_kiwi (74 comments) says:

    This is a bizarre paranoid piece from The Standard. Sometimes, a better deal is just a better deal; especially given the hyperinflation in house prices in the last 5 years. Now that the cheap overseas money tap has been shut off, house prices will crash at least 30%, and perhaps as much as 50% to meet the historical ratio with incomes and rents.

    A real shame that Labour didn’t step in to enforce sensible lending and avoid this mega-bust. Legislating that all mortgages require a sizeable deposit with affordable repayments, and cutting tax advantages for investors, might have funnelled funds towards more productive investments instead…

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  22. OECD rank 22 kiwi (2,753 comments) says:

    Who in their right mind would buy property right now? The market is crashing and a property bought right now will be worth less in value in two years than today. Better to apply your funds elsewhere and wait out the property crash.

    Too bad there is nothing else to do in New Zealand other than invest in property. It’s not hard to see why the country is such an underachiever. How strange that the country always has to be dangling on the edge of a precipice before a sensible course of action is taken on the direction of the economy, not by choice but by force of circumstances.

    You really have to question whether New Zealand is going to make it as a country after all.

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  23. expat (4,050 comments) says:

    Roughly speaking

    1. You are paying as a ballpark figure twice what you borrow over a 20 or 25 year housing loan
    2. So if you borrowed say 300k of a 345k house you’ll be gifting 300k+ to Aussie Bank Inc.
    3. So you ‘saved’ 345k over 20 or 25 years
    4. The house say for arguments sake trebles of that time to be worth 1.05m
    5. Takeaway your 300k gift to the aussies = 700k
    6. Takeaway your maintenance costs of say 1000 a year = 675k
    7. So its a good leveraged investment that forces you to save
    8. However if you were a disciplined saver with a good accountant you could probably do well renting.

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  24. expat (4,050 comments) says:

    oh, and you dont have to do any DIY.

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  25. PaulL (6,035 comments) says:

    I’m with virtualmark:

    buying a home isn’t a strictly rational decision

    I didn’t want one for years. Finally pressured into buying one by swmbo, it was OK, hated having the debt hanging over me. Sold it and left town. Rented again in new location, loved it. Eventually, pressure again, bought a new house.

    There was nothing rational about the decision to buy, everything rational about the decision to rent. Still I ended up buying. But I enjoy the DIY, and I’m pretty sure it will never lose all it’s value, something I probably can’t say for my other investments.

    One thing that I think people miss is that I happily rented a house worth way less than what I bought. Apparently swmbo could stomach renting a small house (it’s only for a short while, we can rent a bigger one later etc etc), but when it comes to buying it feels more permanent, so you better buy a really big one. Result – living in a more expensive house that does exactly the same thing the cheaper one did (keep my head dry, provide a place to sleep etc). In a rational world that is a bad idea. In an “isn’t our house nice” world, makes everyone happy.

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  26. expat (4,050 comments) says:

    Renting isnt a stupid idea at the moment. If you follow through with the themes as above you’ll find that if you are disciplined enough to save what you would have spent on a home loan you’d come out ahead on current projections.

    Buying a house now is pretty dodgy given the downside is looking to be about 2-3 years. That said, a long term investmnet smooths out short term kinks in the return.

    Pierson is talking his usual bollocks though, he ignores the basic maths and the state of the play at the time.

    But I guess thats why Hulun and Mikhael are about to get turfed.

    Hope they’ve got that WHO teat warmed up.

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  27. kevin_mcm (152 comments) says:

    about 15 years ago I owned a leasehold property and the lease fell due – increase in ground rent from $300pa to $20,000 pa. I was part of a group of affected owners who made a submission to the Lusk committee set up by the government. I did an analysis of house price movements in Auckland for the previous 21 year – 7% compound growth nett of inflation. I imagine if I did the same analysis over the last 15 years the result would be similar even allowing for any drop in current values). When you factor that rate of growth in value into the calculation, the answer is simple. Renting may be a sensible short term solution when you think the market is going down, but long term it requires the discipline to invest the difference between your rental cost & ownership cost in income producing assets (which most people will not do) to be a sensible option.

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  28. expat (4,050 comments) says:

    Hi Rob!

    Thanks for that!

    Can you paraphrase your argument, I couldnt quite follow what you meant above without linking to your labour website.

    HTH’s refine your site.

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  29. Dr Robotnik (533 comments) says:

    What no one has mentioned is that

    1) The average kiwi family (i.e. those not sitting debating which bunch of corrupt incompetents are going to fuck our lives up for the next three years) earns next to fuck all in relative terms and struggles to even pay the rent and put food on the table, let alone save.

    2) In order to rent a house, someone has to have bought it first.

    3) Most kiwi houses are shitty (but solid) wooden sheds, that would be considered a nice byre or outhouse in most first world countries, or leaky polystyrene boxes, full of damp, mould and ants.

    4) Renting with a family WILL cost you in maintenance because the little shits tend to destroy anything they touch, landlords don’t like paying for some terrorist dwarf’s collateral damage.

    5) The people making all these predictions, calculations and recommendations are generally pretty fucking useless and should be working in McDonalds.

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  30. expat (4,050 comments) says:

    >>3) Most kiwi houses are shitty (but solid) wooden sheds

    You just need to truncate after shitty.

    You’ve obviously never pulled the walls off a good old kiwi state house and seen the shithouse construction.

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  31. barry (1,317 comments) says:

    All this proves is that old saying “Statistics, damned statistics and lies”

    This arguement regularly comes up and it usually originates at some biased source.

    The problem with the situation is the very tenuous assumption that a renter can save the difference between rent and mortgage. I dont know anyone who has ever done this.

    Ive owned 4 houses over 35 years (and lived in them). Ive just worked out the average increase in value per annum. For example a house in hamilton I bought for $65k and sold for $167K 15 years later. Its average increase is 17%pa. Over the 4 houses the average was 19%. And that has included several down times when prices fell – last time 1999. The current house Im in cost 400, now worth 820 (yes thats about 3 weeks old current valuation) over 14 years – 14.5% (and the $400K cost assumes Ive spent $100k AFTER purchase price on general improvements)

    I dont know anyone, nor have I ever heard of anyone, becoming wealthy by renting and saving the difference.

    However I do know of many who have become wealthy thru property ownership using mortgage finance.

    Anyone who seriously suggests that renting is better needs some help with their maths and their checking of history of house prices.

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  32. expat (4,050 comments) says:

    barry, what was your cost of finance? i.e. what did you pay to the bank in loan interest, I think you’ll find you paid a lot more than you think and made a lot less than you realise.

    Granted, unless you are a good saver you wont make money saving and renting.

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  33. Rob Salmond (246 comments) says:

    Expat – Nice try but no. You want my answer? Click the link.

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  34. barry (1,317 comments) says:

    Hi Expat – the finance cost is irrelevant to this situation.
    The arguement put forward by the property investors forum based their arguement on the basis that property values wouldnt increase over time. The table is 25 years. Now I dont know of anywhere in the world where property values didnt increase over a 25 years period (except maybe Japan. But its important to remeber that its property thats the key word – not housing. Appartments that dont own land can go down in value as its land that increases usually). They also assumed that rents wouldnt increase over that period.

    Im not saying the cost of finance is to be ignored (obviously it cant be) but the basic issue here is that property values do increase and that after youve paid off the mortgage – which includes the cost of finance – you are left with a property that has vastly increased value compared to its starting point.
    If you are one of those very rare people who can save the difference between the rent and the mortgage then youve only got probably an average of 7% interest – which is then taxed. You are left with a hellve lot less than the property owner who in my case got 19% untaxed.

    Its a no brainer.

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  35. dime (10,089 comments) says:

    i bought in 2002. bought a place in milford and a place in west harbour.. within 6 weeks of eachother.. first houses.. almost killed me.. sold west harbour and made a killing, now loving life in milford :)

    at the time i was told not too buy as the market had peaked HAHAHAHA

    also pretty happy i locked my mortgage in for 5 years and 7.5% :)

    ok, im done patting myself on the back..

    oh one more thing… if i had have got a free student allowance and and interest free loan while at uni, i would have owned another house. was paying approx 600 a month in repayments.. :(

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  36. barry (1,317 comments) says:

    Yea – I know that, but Im a simple man and the maths gets a bit complicated for me. All I really know is it doesnt matter really which way you look at – unless you purchase a house sited over an asbestos dumping site – that there is no better investment for the guy or gal in the street. Yes cocaine importing has a higher profit margin, but its a mite more riskier as is robing banks.

    And like importing cocaine, owning your own property is also tax free – legally, unlike the cocaine trading setup.

    Now the only setup I know that is even remotely legal (actually it isnt any more) and matched a compound interst rate of around 6% tax free was a setup used by several investing outfits whereby the money was run thru an australian bank and reinvested in NZ. There was a loophole that gave this effective tax free status.

    There is no way that you can match this sort of thing by saving the difference between rent and would be mortgage – and buying now or in the next year or so will give even better returns over a 25 year period.

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  37. PhilBest (5,125 comments) says:

    Look, the second comment on this thread, from Owen McShane, is on one of the most important subjects that just doesn’t get any political traction because most people are too stupid to be able to get their heads around the idea.

    You restrict the availability of land through regulations, and the price of land goes up. Land becomes a good inflation-beating investment. The price of land goes up some more. People complain about the cost of housing, the government encourages easy credit, which is the wrong end of the problem from which to approach it. The prices go up even more.

    Can we understand the idea, “vicious circle”?

    Owen is right. The only place in the world where land values have stayed consistently proportional with incomes, is Texas. The “bubble”, and the liquidity crisis, has virtually passed them by. Reason: they have the most relaxed approach to zoning and the incorporation of municipalities you could imagine. What is so friggen hard to understand about this?

    One of the problems here is that people who are already on the train of home ownership have a vested interest in the regulatory regime that preserves their neighbourhoods and regions from development, and the increasing property values are regarded by them as a bonus. If they need to sell up and buy again, so what? They’re selling and buying in the same market. Meanwhile, the person who has never owned a home is getting progressively further and further locked out of the process. This is not good for society, full stop. There are good solid social positives involved in participation in the club of property ownership.

    In fact, this phenomenon is just one of several by which a regulatory regime actually causes increases in inequality. Leftwingers whinge and whine about increases in inequality but fail to get their heads around the real causes of it, finding convenient scapegoats on the basis of failed and discredited Marxist theory instead. And most people fall for it – DUH !

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  38. PhilBest (5,125 comments) says:

    While I’ve been roused on this topic, here is some more factors that are to blame for increases in inequality.

    Neglect of roading and other public infrastructure. The negative effect on economic well-being is more damaging to poorer people.

    Use of public money on art and cultural facilities that benefit wealthy users of those facilities at the expense of the poorer majority.

    The breakdown in traditional marriage, which tended to dilute “classes” through intermarriage and the broader spread of inheritances. Not to mention the tendency to poverty inherent in solo parenthood, full stop.

    The use of public money to subsidise tertiary education. People with tertiary education tend to be better off in the future. If inequality is bad, why is tertiary education a justified use of taxes paid by poorer people? What would be the difference with using taxpayer money to help people start a business? And by reasons of upbringing, it tends to be people who were better off in the first place, who go to uni. Scholarships for poorer people with the gifts to succeed is a different story.

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  39. Kimble (4,442 comments) says:

    Well done with that worthless analysis, Rob Salmond.

    So gracious of you to allow the renters to invest in a riskless term deposit and the home-buyers to gain from a risk premium by purchasing a risky asset. Looking at it from that perspective of course the buyer of the house will be better off! Fail.

    And where the hell did you get the idea that a term deposit is priced as a multiple of inflation???? So if inflation is 5% then we should all be getting term deposits paying 15%? Super fail.

    And what do you even mean by rents being higher risk? I just dont see how you can justify that statement. Assuming rental yields at 6% needs to be justified as well.

    The long term inflation estimate of 1.5% is looking further and further off, given that years of Labour government oversight has left the RBNZ with little credibility in its fight against inflation.

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  40. liz_shaw (24 comments) says:

    It depends though on whether or not you can place a monetary value on having an investment as opposed to having money go towards someone else’s investment.

    It also depends on how much you pay each week in rent, for example, it would be better for me to buy a house than to rent.

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