Buy vs Rent

May 31st, 2009 at 11:00 am by David Farrar

The SST reports:

FOR THE first time in years, buying your first home is cheaper than renting. New figures released by interest.co.nz reveal affordability has tipped in favour of buying it now costs slightly less each week to pay the mortgage on a typical first home than to rent a similar property. …

The interest.co.nz figures show that in April it took 23.2% of the typical first-home buyer’s income to pay the mortgage on an entry-level house. Renting that same house would take a fraction more 23.3% of weekly take-home pay.

I’m going to start looking at property to buy in around nine months. I think prices will drop a wee bit further yet.

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30 Responses to “Buy vs Rent”

  1. reid (15,527 comments) says:

    “I’m going to start looking at property to buy in around nine months.”

    Yeah well if I was you, I’d listen to people like Hickey. Prices have a long way to go yet.

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  2. Anthony (736 comments) says:

    In a decent suburb it is mostly still far cheaper to rent than to buy – where an average three bedroom house will still set you back $400 to 550k.

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  3. Glutaemus Maximus (2,207 comments) says:

    Sorry old bean, but the predictions of further falls will be skewed by the number of ex-pats returning.

    Plus the 3rd wave of British Immigrants. Cambridge is over 25% Pom already. Then there are a lot of SAFAS, and Aussies preferring these shores. They are the mobile ones with a bit of lucre.

    Spring will see a hardening of prices, so I would start looking in earnest and get a fixed rate loan.

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  4. Viking2 (10,704 comments) says:

    Dpf. Check out these analysis. Property is movin. I know this is about the budget but go to Rogers site and read his back analysis. His is the most reliable analysis of the NZ market that I am aware of.

    http://www.sra.co.nz/pdf/TreasuryForecasts.pdf

    http://www.sra.co.nz/literacycentre.html

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  5. reid (15,527 comments) says:

    “Sorry old bean, but the predictions of further falls will be skewed by the number of ex-pats returning.”

    The resiliency of the property market for the next few years will be determined less by demand and more by availability of credit.

    I agree prices in the Spring may harden for awhile, but it’s a dead-cat bounce.

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  6. brucehoult (185 comments) says:

    It won’t take a very big increase in interest rates to turn that equation around. And they will rise with the amount various governments are planning to borrow.

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  7. Bullitt (135 comments) says:

    When will people realise interest rates only have a short term impact on housing affordability. When your deciding whether you can afford a house the only important factors are income (and how stable etc your income is) and house prices.

    Just because I could buy an entry level house in Wellington for only 10 times the average salary (or whatever the numbers are) doesn’t mean I should do it just because interest rates are 6%. What about in 5 years time when I still owe 9.7 times my average salary but interest rates are now 10%.

    Im amazed by the Kiwi psyche that house prices have remained as high as they have. Im not aware of anywhere else in the world that has blatantly ignored their house prices being so overvalued and refused to let them return to a fair price. As soon as sales volume returns to the market the price will correct, at the moment prices are being held up because noone is selling.

    Im waiting awhile yet. Even if you ignored the huge capital losses I would face theres not a show I could buy a house of the same quality in a nice area for what Im paying in rent.

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  8. s.russell (1,486 comments) says:

    House prices are largely a matter of psychology. If people believe they will go up, then they will, because they will act on that belief by buying, and will be be prepare to pay more to do so.

    So what does the average Kiwi believe? Has the current recession and fall in in house prices knocked over the totemic belief in ever rising prices and the virtue of property as an investment?

    Possibly not. The very fact that the impact on New Zealand of the global downturn has been (relatively) mild may convince people that the 9%-odd fall in the last 12-18 months is merely a “correction”.

    I fear that the bubble will resume its mad inflation. And I fear that the Govt will do little to discourage it, despite the long-term harm it does to the nation.

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  9. Hagues (711 comments) says:

    DPF “I’m going to start looking at property to buy in around nine months.”

    This doesn’t have anything to do with your big night out involving oysters and Cactus Kate a few weeks back does it? :)

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  10. Viking2 (10,704 comments) says:

    The ultimate determinant of house prices is supply and demand. If the supply runs short as it is currently and the demand is there as it is starting to be because the countries population is rising, then the price will rise.
    That rise in NZ will be ably assisted by the cost of building new houses and that is definitely on the increase.
    The next hurdle will be to find someone to build them as a lot of the builders are retiring or have gone to Aussie.
    Anyone who thinks house prices are coming down much anytime soon simply fails to do their homework and fails their maths test. By September this year we will have a housing shortage in the making. Its is already showing in a shortage of listing and a rapid decline in the houses listed for rent in some area’s.

    Its simple, logical and no mystery. Read Rodney Dickens reports again.

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  11. reid (15,527 comments) says:

    “The ultimate determinant of house prices is supply and demand.”

    Yeh no kidding, viking. As does everything else in the capitalist system. That fact notwithstanding, short-term factors also influence price.

    By short-term, read years, not months.

    Credit availability is currently being determined by the GFC. That has a long way to run before usual transmission resumes.

    If you are one of the many who think the GFC is just a cyclical correction, then you will unfortunately continue to be surprised. The GFC is a structural failure and until the US and UK/European politicians take action to eliminate the cancer from the financial system, it will continue to run like a dog. So far they have shown absolutely no sign they are willing to take this action, because it means that their supporters will lose billions of dollars. Instead they are currently following the advice of those who caused the failure in the first place. Consequently, the US is heading for stagflation, as someone mentioned a few days ago. That is perfectly accurate, and you watch what happens to the international credit markets when that begins to show itself.

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  12. Glutaemus Maximus (2,207 comments) says:

    As long as you treat a mortgage payment, as a rent payment then everything will be fine.

    Sure we are not comparing apples for apples here, as most Mortgages will require a deposit.

    The main culprit in the rising price race is the mindset of folks looking to make a Capital Gain, and then go again with the acquisition of some rental units.

    I am no socialist, and prefer markets to decide. It is about full time that the income (Gross) from renting residential property was taxed at 40%. With no allowances at all. Just watch how many more folk would ultimately be able to get into ownership.

    In the short term it would drop House prices by over 15%. IMHO. And no bad thing.

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  13. reid (15,527 comments) says:

    Well said GM.

    And get rid of the LAQC regime, introduce capital gains tax on everyone who buys renters, and revise district planning so that land is freed up quicker and easier.

    Politicians won’t do the first two because they know its political suicide. Even Cullen said that. Fact is, they’re there to do the right thing for the good of the nation, not for their own re-election. Not one of them has ever acted that way.

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  14. TimG_Oz (883 comments) says:

    As long as you treat a mortgage payment, as a rent payment then everything will be fine.

    I am no economist, but I think you need to look at it a different way.

    The Interest portion of your repayment is like rent (once it’s gone, it’s gone forever), whilst the portion that pays the principle is like savings (as is the deposit). The “Capital Gain” on the property should only be measured over the course of the owneship of the property, and should be compared against the gain you would have against other investment options e.g. Bank interest or Shares.

    There are also other factors (i.e. rates, maintenance) which renters don’t pay, but the majority is the mortgage repayment.

    In Australia, you pay Capital Gains tax on investment properties. However, during the Keating years, income tax was at a ridiculous level, such that people bought investment properties purely as a way of Tax avoidance. This was a huge factor in prices increasing to the high levels they are now. In Australia, you also pay Stamp Duty – at levels which have not changed for a very long time.

    This means that regular low income earners pay a tax at a level that is supposed to only apply to luxury homes when they purchase a house.

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  15. Ruth (178 comments) says:

    Offshore banks think Auckland and Wellington are at a bottom. I would not count on prices falling much further DPF.

    Don’t listen to Hickey – he is a permabear…which is ok if markets are downtrending, when they start uptrending like DOW and so on permabears’ credibility is shot and cannot be regained.

    No one of any consequence listens to Hickey offshore or in NZ. He spends all his time trawling the world for bad news.

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  16. GJ (329 comments) says:

    Now is the best time to buy, house prices if they do fall it will be minor (depending where you live), but just watch interest rates climb. He who hesitates will be paying a lot more! Fear drives prices down and that fear is abating, greed pushs them up and that will soon return. I have seen it all so many times before. Why is it that the smart investers have been active in the market for the last 4 months! Come on Kiwis we are currently selling our country to overseas investers one house at a time and they won’t resell them at less than they purchased them for. No wonder that most of the wealth is in the hands of so few when you read so many of these bloggs. I sometimes wonder if they own any property that they proclaim to be experts about.

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  17. Glutaemus Maximus (2,207 comments) says:

    I will put all of Sonics achievements on a pedestal if I am proven wrong on the pricing sentiment.

    There is a lot of pain out in the Commercial World. However is times of stress, people revert to safe options. Quality Houses being one of those options.

    Do not underestimate the amount of Houses being picked off the lists by cashed up Immigrants.

    The listings are fewer, but they are more likely driven by real and rational factors. Not just a punt to see if any one is daft enough to pay through the nose.

    Interest Rates will rise Spring or a tad later. They have to, because NZ is dependent on Foreign Cash.

    I was wrong once, but in the final analysis, it actually turned out that I was right after all!!

    ;-)

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  18. kiki (425 comments) says:

    Predicting house prices is worse then picking weather. If migrants running from England and Korea turn up then it may drive up prices but this could be a false dawn as the income able to be earned in NZ is not good so unless those people are self supporting then any price rise would be just people paying in relation to their homeland. Then there’s personal debt and the problem that the younger generation are in debt with no assets, this has to be worked through.

    Why Berbard Hickey is so negative is that he probably realises that our earning potential is so low that most of the people in NZ are no better than a chinese worker but with the lifestyle of a American. that is the problem

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  19. Viking2 (10,704 comments) says:

    “No wonder that most of the wealth is in the hands of so few when you read so many of these bloggs. I sometimes wonder if they own any property that they proclaim to be experts about.”
    So right GJ.

    GM and reid, you both are abysmally ignorant about housing. If anyone is pushing house prices this year it Housing NZ. Buying and leasing as fast as they can go to rent to your beneficiary mates for $89.00 per week. New four bedroom ones at that.

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  20. Glutaemus Maximus (2,207 comments) says:

    I defer to your superior knowledges having only ever bought 40+ properties in 4 countries.

    Presumably they will embalm you in yours before they send you down the Fjord on fire.

    To-night might make sense with the Global warming we are having at the moment!!

    ;-)

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  21. Fred (176 comments) says:

    GM what we are experiencing now is consistent with warming; Increased circulation with the Antarctic. Vicking2 HNZ buying properties to lease at a loss?

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  22. kiki (425 comments) says:

    http://www.stuff.co.nz/life-style/2460850/NZ-hot-property-around-the-world

    And this too. really who knows

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  23. RainbowGlobalWarming (295 comments) says:

    Property is theft dude, down with the man, collectivise property ownership under the benevolence of the state*

    FWIW, the direction of real estate in general in NZ will be driven, IMHO, by the health of the global financial & credit markets and by this I mean the orderly or disorderly cauterising of bad debt black holes like GM.

    And at the moment the trend is down. Maybe that will change in 9 months but a bit of a fillip leading into winter doesn’t change that trend.

    Kiki, the REINZ and the realestate.co.nz peopleare looking to keep listings up. The fact is they (realestate.co.nz) are hardout surveying overseas users who logon to their website or view their stories on the news web sites in order to perpetuate the story about overseas demand

    * channelling the workers party

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  24. Paul Marsden (935 comments) says:

    “The next hurdle will be to find someone to build them as a lot of the builders are retiring or have gone to Aussie”

    Actually Viking, the building industry is being overtaken by immigrants, driving down labour prices and forcing many tradesmen either offshore or, onto the doll queue.

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  25. Sean (294 comments) says:

    Hagues, that’s brilliant…

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  26. Anthony (736 comments) says:

    Supply and demand does determine price but a slowing of new supply doesn’t necessarily signal prices will be increasing soon as there is a lot of scope for demand to be moderated with young adults staying at home longer or returning home, owners taking in boarders, etc. There is no good reason houses are still worth substantially more than five years ago?

    I’m certainly not happy that my taxes subsidise hundreds of thousands of amateur landlords who exploit outdated tax laws to reduce their tax – but by buying crappy old houses contribute nothing to increasing the supply accommodation!

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  27. tvb (3,938 comments) says:

    Anderton needs to find the 500 people to be members of his party. That is probably his biggest problem. He cannot be a Labour MP as he is past the retiring age of 70 for Labour MPs. So he will keep his progressive party going for as long as he can and collect all that extra funding etc

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  28. Glutaemus Maximus (2,207 comments) says:

    There is also a lot of couples breaking up, youth leaving early and not going on an OE. Older folks living longer. P lab house becoming uninhabitable. Could go on a long time.

    FFS, everyone knows about houses. I have taken a broad brush Macro view. May well be wrong, but we will see what Spring brings.

    And yes the real estate agents are bending every statistic known to man in order to show some green shoots.

    They will have to wait till Spring as well. That is Nature’s way. Plus a lot of folk will be pissed off having to put up with damp, condensing, chilly, expensive to heat dwellings. Kiwis have been too lax on building regulations for far too long.

    This Global warming is having all sorts of benefits to the economy.

    And by the way Fred. AGW is a hoax. Unproven Science, based on flawed statistics. Just name me any Island anywhere in the past 10 years that has been evacuated due to sea level rise? It was promised by those weirdy beardy Scientists that this would have happened by now. Think we will be waiting a long time. with the family diving in the Maldives, the first time 12 years ago. It was mooted then. after Y2K, In the abscence of nothing to scare the populace to death, we were there early 2000, and our Danish friends had advance warning of the Attoll’s doom.

    Utter bollocks!

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  29. Banana Llama (1,105 comments) says:

    Immigration stats would be the best thing to look at imo, whether or not “Kiwis” can afford houses is irrelevant it will be the cashed up migrants that will do the most damage, i mean will aid the recovery.

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  30. Fred (176 comments) says:

    The case against AGW isn’t proven by a failure to meet hyped up predictions. The increase in sea level last century was 20cm and in most places erosion or accumulation of sediments in the same period would mask this. On low lying islands it’s a constant battle anyway (as it is on any coast) and 20cm is again neither here nor there when it comes to building/maintaining sea walls.

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