To Buy or Not To Buy, That is the Question…

Buying is undoubtedly more expensive than rent, but how much more expensive - and is the investment worth it?
Our mortgage broker breaks it down by the numbers...

For our example, we’ve used data from our hometown of Tauranga, sourced from current rental listings on TradeMe. Two bedroom places for rent range from $520 - $995, three bedrooms run from $530 - $1100 with the large majority being $850 - $900, and four bedroom homes are going for $700 - $1400. Let’s compare a mid-range rent of, say, $750 a week, to buying a comparable home for $750,000.

Renting for Five Years

Remember, your rent can increase at any time - as often as once a year - and in New Zealand there’s no cap on the amount of the increase. Factors such as location (including proximity to schools) and supply versus demand will also affect the size of rental increases, but rents have historically increased by 4.8% per year on average.

So, the property you rent this year for $750 per week is likely to be costing you $904 a week in five years’ time.

A Home Loan over Five Years

Let’s look at buying a house comparable to those for rent at $750 a week - a fair budget would be $750,000.

To calculate the mortgage repayments on a house worth $750,000, we’ll assume the home was purchased with a 20% deposit, and we’ll also assume it’s a 30 year mortgage with interest rates at, let’s say, 6.8%.

Repayments will be $899 per week, but we’ll also need to add insurance and council rates of approx. $100 a week - giving us a total accommodation cost of around $1000 a week.

So… although initially buying is more expensive than renting, in five years’ time the rental market will likely be close to what you’re paying in mortgage repayments - $904 compared to $1000. And don’t forget - over this period, you’ve also been paying the loan off, whilst building equity and creating wealth for yourself at the same time. (In fact, you can think of the difference a bit like enforced savings - it’s all a matter of perspective!)

How much equity/wealth? Let’s have a look…

Economists estimate how much property values will change over time. Current conservative estimates are for house prices to increase by 4% on average each year. This means the home you buy today for $750,000 could be worth $877,000 in five years’ time - an increase of $127,000.

If you were to try and save $177,000 within five years, you’d need to put away $634 each and every week into a savings account paying 3% net interest per year – on top of your rent.

A better way to judge return on investment on property is to take a longer term view of 10-15 years. During that time, values may rise and fall (as we’ve seen happen quite markedly between 2020 and 2024!), but are currently expected to average out at that 4% level.

Is now the time to buy?

At the moment the sentiment for house prices over the next year is subdued thanks to high interest rates caused by inflation.

But - it also looks like we’ll be in for a reprieve on inflation - and therefore interest rates - in the next year or so. This will make mortgage repayments easier and more affordable. Combine this with a massive amount of people moving to New Zealand (increasing demand for housing and not enough new houses being built to cater to these new residents), as well as changes to tax settings on residential property, and we can expect good things on house prices over the next few years.

Based on this, I reckon now is a good time to buy - and clients I’ve helped with mortgages recently have been able to take advantage of generally lower house prices and a greater supply of properties available.

You know the old saying, Buy Low Sell High!

Lifestyle Factors
Don’t forget to factor in how difficult it can be to find a nice rental, especially if you have pets. Demand is hot (especially for the more affordable or otherwise more desirable properties - better locations, nicer homes) and you’ll be competing with a lot of other people.

Renting comes with extra drawbacks, too. As we mentioned above, there’s no limit on how much your landlord can raise the rent by, and if you can’t afford it, there’s little you can do about that - you’ll have to move. And the same is true if the owner wants to sell the house - chances are you’ll have to find a new home. You’re also very restricted in what you can do with the home to ‘make it yours’, and you’ll need to open your home up to a landlord inspection a few times a year.

Owning a home is much more attractive for all the opposite reasons. Your house, your castle - so there’ll be no strangers coming through to inspect how you live, you can really make it your own with painting, decorating and design changes, and you can grow your family however you like.

While mortgage repayments are undoubtedly more expensive than renting over the short term, buying is a no-brainer if you take a longer view. Weekly rents are likely to catch up to your otherwise fixed mortgage costs within a few years, and the equity (and wealth) you build over those years is likely to far exceed what you could save on top of rent! Plus, the sense of stability and security that comes from owning your own home? Priceless.

Ready to get started on the journey to homeownership? Contact our mortgage brokers today.

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.