Owning your home not always the best option
Most New Zealanders grow up expecting to own their own home, but soaring house prices have made it harder for people to get into the market. Does that matter? Is home ownership all it’s cracked up to be?
There are some obvious advantages to owning a home. It gives you security and pride, and the freedom to decorate, garden and make improvements as you please. And nobody can kick you out.
However, there are also advantages to renting. You can move easily and cheaply, and you have less responsibility. These days, too, New Zealand rents are at an all-time low relative to house prices, according to the Economist magazine.
Obviously, if you rent and spend the rest of your income, you will reach retirement with much less wealth than a homeowner.
But disciplined renters who save the difference between their rent and what they would have paid for similar accommodation — including mortgage, insurance, maintenance and rates — will sometimes end up better off.
In my recently launched book, “Get Rich Slow: How to grow your wealth the safe and savvy way”, I compare the fortunes of Hannah Homeowner and Ronnie Renter, who invests in shares or a share fund and never owns his home.
The comparison is complicated by the fact that Hannah uses a mortgage, which means her investment in her home is geared, while Ronnie doesn’t use gearing.
Who does best over the long term? “That depends on many factors: the size of Hannah’s mortgage, mortgage interest rates, the growth rate in house values, the growth rate in shares and so on. If we plug in one set of reasonable numbers, Hannah wins. Change a few assumptions, and Ronnie wins,” the book says.
“There are other financial considerations, too. If Hannah wanted to raise a loan to develop a business, she could borrow against the equity in her house. Ronnie might not raise money as easily. On the other hand, Ronnie could cash in his savings and invest directly in the business. Also, Ronnie can more easily diversify his savings.”
But other issues, such as your stage in life, often matter more. People with school-aged children tend to want the security of home ownership, whereas younger people might prefer the freedom of being tenants. Some empty nesters enjoy that freedom too, but many want to be in their own homes by the time they reach retirement.
Personality matters too. Some people love to spend their spare time doing home and garden maintenance; others hate it. As someone said, “Did you have a good weekend or do you own your own home?”
If you’re the homeowner type but you have yet to buy your first home, don’t get too down about it. The housing market is slowing. Even if average prices don’t fall — and they might — there are sure to be some bargains in the next few years, sold by people tired of being on the market.
In the meantime, I wouldn’t recommend saving in shares or a share fund, like Ronnie Renter. Volatile investments such as shares should be long-term. But you can build up your house deposit nicely in term deposits, which pay pretty high interest these days.
And if you hang about for a few years, and you are not on a high income or buying an expensive house (the cut-off numbers are not yet decided), KiwiSaver might help you.
If you sign up for the scheme next April, three years later the government will give you $3,000 towards your first home. Or you can get $4,000 after four years or $5,000 after five years. And a couple can get twice as much. It all helps.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.