Is paying rent to the landlord “dead money”? Bruce Morris gets out his calculator and crystal ball to come up with some answers.
Interesting to see on the Herald's website last month the number of hits for a story featuring an economist who was pointing out it's cheaper to rent than to buy. It was the best-read item of the day (and one of the biggest of the week), almost as if readers thought it was ground-breaking stuff.
The reality is that over the years it's usually been cheaper to rent in Auckland, though the uncertainty of interest rates and capital gain can have the economic argument lurching about. Then there's the matter of luck with timing: buying at the bottom and selling at the top after a surge will always find the buyer ahead of the renter.
Looking at the equation from a purely numbers point of view ignores compelling arguments of emotion and security.
There are good landlords and ordinary ones and getting that leaking tap fixed or permission to paint the bedroom can be a mission. It can also be uncomfortable being at the whim of a landlord with the power to give as little as six weeks notice to tidy up, get out and find a new place.
While being at the whim of a bank can also have pressures, home ownership brings security and the pleasure of doing what you like to your property.
Most of us want a refuge where we can close the gate at night and forget about the office and the world, chipping away at the mortgage and watching the trees grow.
At the back of our minds, our homes are probably also part of a grand plan to better ourselves - to get to retirement in one piece, enjoy our twilight years without great worry and, hopefully, leave a bit behind for the kids.
So it's great to aim at buying a home to live in, but don't think that renting is "dead money". That's a curiously New Zealand perception. The savvy would see it as no more dead money than the interest paid on mortgages. Instead of handing money to a landlord, it's boosting bank balance sheets and giving depositors a return on their funds.
A casual look at property values and rent in Auckland today shows that the economic argument in favour of renting is sound.
Let's take two identical houses sitting side-by-side in Mt Roskill. The average house in the suburb is now worth nearly $530,000, according to QV, and the average rent there for a three-bedroom home is up towards $430, reports Crockers.
In our study, one of the houses is bought by Mr and Ms X for $530,000 on a deposit of $60,000 and they obtain a $470,000 table mortgage on a 20-year term with a current floating rate of 5.7%. That would make their fortnightly payments $1516 ($758 per week) and over the period of the loan interest payments would total $318,320 ($306 per week).
All that assumes interest rates will stay at their record lows - and they won't, of course.
Floating rates went as high as 20.5 per cent in 1987 and have been consistently above 7 per cent most years since. An average rate of 7.2 per cent through the 20-year term would seem realistic and that would push repayments to $1707 a fortnight ($850.50 a week) on the property. The interest bill would reach $417,640 over the 20 years.
Mr and Ms Y, meanwhile, would initially be paying $430 a week ($22,360 a year), though annual rises of 4 per cent will push their average weekly rent across the 20 years to $671 - giving a "saving" over the 7.2 per cent mortgage (principal and interest) of $179.50 a week.
Rates (now $2000 a year, but $2780 when averaged out across the 20 years, assuming a modest yearly rise of 3 per cent), insurance ($600 a year now, and an average of $715 a year given a 3 per cent-a-year increase over the two decades) and an average maintenance/do-up bill of $3000 a year are all extra costs for Mr and Ms X. When they are added, the difference grows to $304.40 a week in favour of the renters.
If Mr and Ms Y could save that sum each week, they would end the first year with a bank term deposit of $15,828. Over the 20 years (contributing the same $429.25 a week), fuelled by simple compounding interest of 5.25 per cent a year, the grand total would hit $605,650. Take away tax and there might be a net $500,000 to enjoy - and the results would be much stronger if the renters increased the risk a little to quality corporate bonds. Add in the $60,000 they did not have to spend on a deposit and instead invested in a 5.25 per cent term deposit, and Mr and Ms Y will have $150,000 (after tax) to add to the kitty. That brings them to net savings of $650,000 in 2032.
Mr and Ms X, meanwhile, end up in 2032 paying a total of $887,640 ($417,640 of it in interest). On top of the mortgage costs, rates ($55,600), insurance ($13,420), maintenance ($60,000) and selling fees ($50,000) will push total outgoings to $1,066,660.
But, of course, they have a house to show for it. So what is the house worth?
Who knows what is going to happen in the next 20 years. New Zealand house prices have shown a steady upwards track over the decades, though there have been plenty of dips and flat periods around the spurts. In 2032, we could be at the very peak of the latest spurt or at the end of a three or four-year plateau, and the result would vary accordingly.
Capital gain may not be expected to match the 20 years from 1992 in Auckland where prices increased 3.6-fold after riding the 2002-2007 boom. But if it does the property would sell for around $1.9m, reflecting an annual rise in house values of 6.5 per cent - leaving the renters behind by around $180,000.
If the two-decade rise in value was almost as impressive at 6 per cent a year, Mr and Ms X would still be ahead of the renters - but by just $38,000 in 2032 dollars.
Anything below that would leave Mr and Ms Y in front. A lift of 5 per cent a year, boosting the selling price from $530,000 to $1.437m over the two decades, would have the renters ahead by $280,000.
The figures here are based on the entirely unlikely proposition that someone could rent the same property for 20 years, and the mathematical bombardment is enough to make any eyes glaze over. But the numbers do help to illustrate the case for renting.
As we all know, though, it isn't all about dollars and cents. Home ownership forces us into a sort of de facto savings scheme, where every dollar off the mortgage contributes to our personal wealth and we put our faith in history to trust that capital gain at least stays up with inflation over the long haul.
But if we're renting, how many of us have the discipline and the will to bank the gap? It takes some sacrifice to buy a home - certainly that first home - and the same pressures often aren't there for renters.
Unless renters have unusual restraint, the flat whites, restaurants and trips away will gobble up much of the difference. They may enjoy the moment but careful home-owners will have their day.
In our fictional case, would Mr and Ms Y really have been happy all those years putting up with a cracked driveway, ugly colours on the bathroom walls and a landlord who took forever to fix the cracked toilet bowl?
Surely not, but as the rest of us ignore the economists and put our own value on making a home we can call our own, no one should be telling renters they're paying out dead money.By Bruce Morris