Renting versus buying in a low interest rate environment

Jessica Satherley
Renting versus buying in a low interest rate environment
Is buying instead of renting really the best idea for everyone? We asked the experts.

Becoming a homeowner is one of the biggest financial milestones in a New Zealander’s life, but is buying instead of renting really the best idea for everyone? 

REDnews looked at the real cost of buying versus renting. 

Although interest rates have dramatically nose-dived recently, renting vs buying is more complex than just comparing mortgage payments to rent payments, Westpac NZ Chief Economist Dominick Stephens says. 

“The correct comparison is the interest payments on the mortgage versus the rent, not the total mortgage payments because paying down your principal is a form of saving.  

“But in addition to interest costs, buyers also need to consider rates, maintenance costs, a potential change in interest rates in the future and there could be capital gain or capital loss in the future.  

“All of these things affect the rent or buy decision,” Stephens says. 

The economist also notes that buyers with high deposits are the ones who benefit most from purchasing property. 

“Generally, the more savings you have, the more the rent-versus-buy decision swings in favour of buying. 

“People who are able to muster only a small deposit end up with the highest interest bill on their mortgage, meaning the comparison to renting is less favourable.  

“At the other end of the scale, people with substantial savings will find that if they invest in anything other than a house, they have to pay income tax on the returns.  

“For example, the after-tax return on term deposits is very low.  

“If instead they plough the money into a house, the only thing they miss is the meagre after-tax returns from term deposits.  

“Meanwhile, they stand to gain by not having to pay rent and by collecting tax-free capital gains over time.  

“That is why I generally say that people should save a large deposit before buying a house,” the economist says. 

Property developer Neil Salter, who developed the luxury Vulcan Apartments in Auckland, has been pitching them as being the same price to buy as rent. 

A two-bedroom apartment in the complex rents for $1,000 per week, adding up to $52,000 per year. 

The same apartment can be bought for $1,325,000, plus annual fees for the body corporate and rates totaling $5,000. 

If a 20% deposit of $265,000 was paid and interest on the remainder was approximately 3%, that would equate to $31,800 per year. 

Therefore, $31,800 of interest annually, plus $5,000 of body corporate fees and rates and a discretionary maintenance fund of $3,200 per year, would total $40,000. 

Depending on the amount of principal mortgage payments the buyer decides to pay would make up the remainder of the cost. 

The roadblock to this kind of investment however is being able to muster up a $265,000 deposit. 

Business Advisor at Wolf and Fox, Toss Grumley,  says that whether it’s more beneficial to rent or buy is dependent on the current housing market cycle. 

“In boom times when property values are soaring it's a great time to own due to capital gains, but when the market is more subdued it can tip the scales toward renting.  

“However, as most of us aren't good at picking what's to come we can be safe in the knowledge that the market always goes up in the long run," Grumley says. 

Grumley also notes that owning can be much more beneficial when owning smaller properties where the owner has a lot of equity. 

“Larger, more expensive homes in upmarket suburbs sometimes rent for a lot less than the mortgage interest payments due if the owners have low equity in them,” he says. 

 

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