First-home buyers’ 10-year, $260,000 rent bill to save deposit

Experts still recommend entering the housing market as soon as possible. Photo / 123rf

By Susan Edmunds of RNZ

A first-home buyer who paid a median rent while they saved a 20% deposit would have spent almost $260,000 by the time they bought a home this year, data indicates.

The number is based on a few assumptions.

First, it assumes they needed the 10 years that CoreLogic calculates an average household would need to save a 20% deposit now.

It also assumes, while saving, they paid the national median rent, which increased over that period from $357 in 2015 to about $600 this year.

Ten years ago, a buyer would have taken about nine years to save the deposit and would have spent just under $140,000 in rent over that time.

CoreLogic chief property economist Kelvin Davidson said the calculation gave an approximation of what a typical first-home buyer might have spent, but because the data was not inflation adjusted, it might not reflect the full impact on buyers in the past.

“Because it’s not relative to incomes, I think it probably makes things look a lot worse than they actually are,” he said. “That said, if you look at our rent-to-income ratio measure from our housing affordability report, which is a normalised measure … at the moment, it’s basically at a record high.

“The conclusion holds that renters right now are paying more of their income towards rent than they have done in the past.”

He said, while rents had been flat or even slightly down recently, rental growth would likely resume before long.

While the years-to-save measure had dropped from as high as 12 years in 2021, it was high compared to previous years, but Davidson said first-home buyers were still active, even with renting posing a challenge.

“There are lots of first-time buyers in the market.”

He said there was an incentive to buy, because in some cases, people could save money on a mortgage payment compared to rent.

“If you can get out of paying rent – expensive rent – there’s an incentive there.”

The years-to-save measure also assumed buyers needed to amass a 20% deposit, he said, while many bought with less than that.

In July, more than $1.1 billion was lent to borrowers with less than 20% equity or deposit.

Davidson said, whether it made sense to keep renting to try to get to that threshold or buy earlier would depend on the individual.

At 20%, borrowers could generally access better interest rates.

“Even with modest house-price growth over a period of time, with the benefit of leverage, there is an incentive to get as much house as you can as soon as you can,” he said. “It doesn’t take a lot of capital growth for that to hold true.”

Davidson said lifestyle choices and other factors would affect a decision.

“You might have a high hurdle to get there, but ... you can change other parts of your spending, curtail other aspects to enable you to pay the rent and save that deposit.

“That’s what people are prepared to do to get the house.”

David Cunningham – chief executive of mortgage advice firm Squirrel – said, when prices were not falling and if people could afford the payments, being in the property market rather than saving up more of a deposit made sense.

“Over time, house prices invariably rise,” he said. “This is because, with targeted inflation of around 2% over the long term, it provides a natural floor for house prices, as construction costs are rising.

“Having a mortgage instils an inherent savings discipline. You can’t avoid mortgage payments, so they ‘eat first’ in a household budget.

“It’s a bit like KiwiSaver – pay yourself, or in this case, your mortgage first.”

He said people who used KiwiSaver for a first home could get back to saving for retirement earlier.

“The difference between a 10% deposit and a 20% deposit could be several years of saving, versus owning the house now.

“Reducing the loan balance, alongside increasing house prices, if that happens, can often reduce the loan-to-value ratio below 80%, which unlocks standard interest rates. My observation is that the longer the runway between buying a house and starting a family, the easier things will generally be.”

He said the most important aspect of the decision was affordability.

“If you can afford the payments with the extra interest loading, if the LVR is over 80%, then consider getting started on the home-ownership journey.”