Best sit tight and save for property

When you stack up the numbers in today's stagnant residential property market and tough economic climate, they favour renting a home rather than owning it.

Take a $400,000 house. You can rent it for $350 a week and pay $17,500 a year without worrying about rates, insurance and maintenance costs.

If you desperately want to own it and borrow the full amount at 7 per cent interest, then you will be paying $28,000 a year on your mortgage.

Throw in rates of $1500 and home insurance of $500, and you will be spending $30,000 a year on your "dream" home.

The investment return on that $400,000 is less than five per cent - similar to what you get putting money on deposit in the bank.

Spending $17,500 a year renting - instead of $30,000 owning - gives you some room to save and build up a bigger deposit.

The landlord, in effect, is subsidising the tenant to the tune of $12,500 a year in a depressed market.

"The subsidy balloons out further up the food chain where the house value is higher, even though the rent is more," says Shayne Donovan-Grammer, a valuer with QV Valuations.

"At the moment, it's better to rent. Save the excess for a deposit and wait for the market to start moving again before buying and gaining some capital growth - that, to me, is the more prudent option," he says.

Donovan-Grammer doesn't expect house values to climb significantly over the next three to four years.

The key to buying in today's market is to pay a "wholesale" price. "If you can buy a house at 5 per cent below its valuation, say $380,000 instead of $400,000, then it should work out," he says.

"If the market continues to ease, then the house value ends up at the price you bought it for.

"Otherwise, there's no point in paying the (present) market value.

"Too often, people stretch themselves by borrowing too much and then, in a market downturn, they end up with high debt levels, making it tough to either service mortgage repayments or sell - as the debt can be higher than the net property value," he says.

According to the latest QV figures, residential property values around New Zealand are, on average, 5.6 per cent below the market peak of late 2007, but in some areas values have fallen more than 10 per cent.

"For a lot of would-be buyers, it will take time to get back into balance before activity can resume," Donovan-Grammer says.

At present, "the balance" is found for houses costing $200,000. You could pay $270 a week in rent, or $13,500 a year. And buying it for 7 per cent interest would cost only $14,000 a year on the mortgage.

"You could tidy it up cheaply and add value to the property. But as the prices get higher, it's better to rent," says Donovan-Grammer.

The exception is finding and buying a home in a special location and paying a fair price.

"There will always be demand for these types of properties - because they are scarce - and they will attract a better than average return," Donovan-Grammer says.

"But the run of the mill brick and tile house, with no X factor, is easy to duplicate and there's no point in buying them, at the moment.

"It will take a while for the market to recover and buyers should spend time finding the right property at the right price - they have to put the work in.

"There's too much mediocre buying and people have to be sharp in their negotiations.

"If there's any issue concerning the property, then steer clear of it," he says.

He says buying residential property is a long-term play.

Buyers can be more patient and make sure they make the right decision and can afford it. Otherwise, there's still time to keep renting and building up capital for that nice deposit.