To Rent or Not?
Rent stress is officially a thing.
It’s becoming so big a thing that renters are very concerned about being forced out literally of places they want to live, near work and amenities. Oft’ quoted statistics suggest that renters are worse off than owners. Define worse! This ‘fact’ is most often touted by everyone who owns a home. But hang on: this seems to ignore some very big factors of owning a home, and how long it may take a wage earner to save enough for a deposit, which is currently almost 14 years in New Zealand. Yikes.
Higher interest rates are a lever that the Reserve Bank is using to cool our growing consumer confidence. Landlords often pass on their higher carrying costs to renters which accounts for the increase in rental prices. Given this trend the housing market has been spooked with fewer listings and sluggish sales. In April, home sales figures dropped to the lowest number in years. So if you are thinking of buying a home, a quiet market can be in your favour.
Fortunately, economic indicators are on our side in New Zealand:
"The good news is that we are not facing another global financial crisis. The bad news is that the absence of a major hit to business and consumer confidence means central banks will still need to raise their interest rates beyond current levels in order to get inflation down." Tony Alexander/Economist
Renting as a choice:
There are many factors that may support renting as a lifestyle. The decision is pretty personal. If you have the means to rent a nice flat or home, chances are it will be in a better location with much lower responsibility for the ongoings like maintenance, insurance, rates and homeowner association fees. In fact, rental landlords are under more stringent requirements to provide a healthy home with higher standards of heating, ventilation and insulation (we pretend winter does not happen in much of the North Island). A vendor selling their own home to a person intending to live in that home is not required to meet the same healthy home standards as rental properties. Many homebuyers forego these niceties in favour of ownership…taking their sweet time to get around to upgrading their home’s old insulation, wiring, plumbing and yes, even roofing! The stories I could tell...
For most people, renting may be a necessary stepstone and provides the experience of household management to allow one to begin saving. Given the slight difference in renting and ownership costs (estimated at just 0.4%), the choice becomes personal. If you are paying 4.6% more for a mortgage this year which you really stretched to afford, vs. your rent (which may be less of a struggle) going up 5% - who is really better off? A simple plumbing repair could eliminate any perceived advantage in home ownership in a heartbeat.
Perhaps the more important question is this: do you see yourself living in a fixed place, with a commitment to holding that property for at least 3 years? To really answer this question honestly one would need to consider schooling, work opportunities, family and many other factors. Naturally, people tend to move more during their early careers. If you subscribe to the ‘buy anything cheap’ and hold it long-term approach - that can work. That is if the maintenance bills don't do you in. But if you just put all your eggs in that basket and your job hops islands, you may need those eggs back out to make the next move.
Financially, 25% of renters pay more than 40% of their income as rent. What about the other 75% who seem to be doing just fine? On average, mortgage, holders tend to pay just under 20% of their income toward housing. Most newer buyers are much more stretched! Certainly, some older homeowners are likely to be more financially established and finally be enjoying the fruits of ownership while not having to scrimp for that deposit. Recent statistics report that rents have reportedly doubled in the last 15 years, while the costs of a mortgage have fallen. Local rents vary widely. It pays to analyze your personal situation in light of your goals. Where you invest and for how long really does matter.
For those who like to delve here are the most recent Stats.
Homeownership as a right of passage
For most New Zealanders, ownership has a steep entry curve with the average home topping $1M these days. Many a free workshop is run by a slick finance coach cum developer, selling the idea of retiring with money in the bank. Don’t get me going on our uninsured bank deposits! The old ‘safe as houses’ mentality is the basis of our wealth according to one commentator who calls our economy: “housing with bits tacked on.” Will we learn to diversify our investments into other opportunities? NZ stocks don’t thrill most people. Crypto is suffering a lack of trust…so where does one put their faith these days? I kinda like land myself…but I digress.
Not so fast?
You can forget flipping property in a soft housing market with lashings of economic uncertainty. As properties lose value, you may not make that mint that your Uncle Bob did inside a year on his little fixer. Add to this, the sheer number of homes that are being permitted for fast-track building and one could argue we will soon be inundated with higher quality affordable housing…well one can hope. These things certainly take time!
It's highly likely that the number of homes needing to be replaced after our recent gales and floods will impact the availability of builders and materials for some time. Fortunately, some private and public/charitable groups are working to improve both the quality and quantity of housing in New Zealand not just for people to buy…but for people to rent long-term. Yes… long term. More news on that very important European trend coming to New Zealand from Simplicity Living NZ.
Stages for ages
Certainly, home ownership is not for everyone. If you are ready to settle down the choice may become obvious.
Younger folks naturally go flatting to lower costs and enjoy a more active social life...while some continue to live communally. Custom cooperatives are growing in popularity including tiny home and cluster home concepts.
What if you are facing your elder years? Many seniors enjoy taking in housemates and appreciate the company, extra money and help around the house. Next steps can feel uncertain if you are suddenly on your own and the kids are pressuring you to downsize.
Flatten my world
My friends and clients on both sides of the world are seeking single-level properties as they age. If you don't want your adult children to move back in with you - downsize early! Let’s face it, as the knees get stiffer, we dream of a flatter place to garden and walk to amenities. We like the idea of supporting local people who offer services on an as-needed basis in a friendly atmosphere. Your cute paper boy may become your chauffeur one day. Aside from the promises of a sexy relaxed lifestyle for the beautifully aging couple, many find a retirement “all in” village concept a tad stifling with too many ‘old people’ and little of the diversity that makes living in a community more fun and mentally stimulating. Not to mention the fact that you are literally trapped (depending on whether you own the title or a 'right to occupy'). I know a very active mid 60’s man who bought the shiny image and moved into a lush resort village where he quickly discovered after the sale that he was surrounded by 98% women. Gulp.
The lure of a shiny new retirement lifestyle is no promise of ownership in terms of building equity. Most villages feature a ‘license to occupy’ contract with a surprisingly high monthly price tag - which, not surprisingly – may escalate as you age into transitional care. The different legal forms of tenure include a licence to occupy, unit title, and various lease arrangements, with related residency entitlements so read the fine print! There are hundreds of Retirement Villages clustered around golf courses and health clubs in New Zealand. It certainly pays to shop around and check the caveats regarding sales. If you intend to sell your real estate assets to fund your retirement (a huge subject beyond this blog), it’s important to set up a proper liquidation plan to go the distance with you. Alternatively, a very nice rental pad in Ibizia over winter could be fun while you adjust to the idea of all that free time. News NOTE: Complaints about Retirement Villages are being investigated by the Commerce Commission.
When climate comes calling
The huge hairy monster of the moment is the very real and observable impact of climate on housing. Our recent gales and flooding have laid bare certain areas that are now being mapped as flood-prone, lava-flow-prone, slip-prone, and yes, earthquake-prone. Unfortunately, a lot of homeowners will be notified by their insurance companies (followed by mortgage banks) that their cost to insure could skyrocket overnight. Then what? In New Zealand, we can all expect to see our rates and insurance fees impacted by the real costs of rebuilding so much infrastructure that has been recently devastated. Is your current home in a ‘safe area’? How would you know? Your right to live on stilts near an ocean could become quite prohibitive if replacing everything you own after a major storm matters to you.
Climate change and the associated economic risks are currently being weighed by RBNZ in terms of the impact on banking and our economy. New maps for elevated ‘high-water’ events are being drawn up as I write. Government is in lockstep with insurance companies facing our current and newly recognized risk factors. Let’s just say that where you buy and whether the home is built to withstand weather and climate events may very well become a much-highlighted new line on the valuation report. Which your bank takes a lot of interest in as well.
In these shifting times, given our ability (or lack) to change along with them, perhaps it’s high time that we take a more appreciative view of renting as a choice. After all, when the going gets tough, people who rent their homes may have a much easier time making important changes. And if you happen to rely on income from your investment property or land-based life: that all ends when the silt comes to town.