Home ownership doesn’t always beat renting
I was a little surprised the other day when I asked a couple of hundred young university students whether they wanted to buy a home in the foreseeable future. Everyone said yes — despite the fact that we’d just been considering why home ownership is not necessarily all it’s cracked up to be.
It seems that most New Zealand adults either own a home or want to. “Rent is dead money,” people say, “whereas if you’re paying off a mortgage you’re making an investment.”
That’s only partly true. In the early years of a longer-term mortgage, almost all the payments are interest. Even across the full 20, 25 or 30 years — for those who keep a mortgage that long — interest often outweighs principal. And the only one who benefits from interest payments is the lender.
But there’s more to it than that. Let’s compare Reggie Renter and Hannah Homeowner, and assume they both want to arrive at retirement with mortgage-free accommodation.
Clearly if Reggie rents all his life, without saving, he’s not going to achieve that. But if he saves the difference between what he pays in rent and what Hannah pays on her mortgage, rates, insurance and maintenance, Reggie could well hit 65 with enough money to buy a mortgage-free home. It might even be better than Hannah’s home.
To save enough, Reggie would probably have to invest in diversified shares or commercial property or in a fund that invests largely in those assets. That means his savings balance would be volatile — falling quite often, and sometimes quite far. But over the decades such an investment is highly likely to grow healthily.
It’s worth noting, too, that the value of Hannah’s house will also fluctuate over the years. I suspect many would be shocked at the volatility of the value of their home if it were auctioned every month.
What’s more, Reggie can much more easily reduce risk by diversifying his investments — in a wide range of New Zealand and international assets. Hannah’s money is all in a single property — or at least one property at a time.
Other advantages of renting over home ownership include: being able to move quickly and cheaply, and not being responsible for home and garden maintenance. As one man puts it, “Did you have a good weekend, or do you own your own home?”
On the other hand, it will take Reggie more discipline to save. If he sets up regular automatic transfers from his bank account — and if he’s not the type to sabotage his own plans just because he fancies a flasher car or a more luxurious holiday — discipline might not be a big problem. Still, he doesn’t have the threat of losing his home hanging over him, as Hannah does if she misses her mortgage payments. She has a huge incentive to keep paying.
Also, with home ownership comes the ability to make your own choices about interior decoration and your garden. And you can’t be kicked out by a landlord — perhaps just when the kids have settled in at the local school.
To some extent, Reggie could share some of those advantages if he could get a long-term lease, something that might become more popular in New Zealand if more people decide to stick with renting for decades. But a rented property is never going to give quite the same pride or security as home ownership — provided the homeowner isn’t mortgaged to the hilt.
That’s probably why the university students all want to own their own home. It’s an issue that involves much more than money.
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.