Property prices have fallen considerably over the past two years, making houses much more affordable than they have been for some time.
Despite this, buyers are still in short supply. The most logical reason for this is that they expect prices to continue dropping or to at least stay flat for
some time.
This creates a dilemma for first-home buyers and people moving towns: Is it better, in the short term, to rent or buy?
Whether you are buying a property to live in or to rent to someone else, there are two factors to consider. The first is the extra income you will have if you buy, either because you are no longer paying rent or because you are renting to someone else.
The second is the capital gain you can expect from owning the property. Property prices are not expected to increase significantly over the next three to five years. At the same time, rents are still low in comparison with property prices. If you can rent a property for an annual rent of 5 per cent of its market value, why would you borrow money to buy when the interest rate is about 7 per cent and there is little prospect of capital gain?
In the short term, with no expectation of property prices increasing, renting makes sense unless you can buy a property well below market value.
For first-home buyers this allows more time to save a bigger house deposit and for others who have sold, it is an opportunity to temporarily live more cheaply in the kind of house that might previously have been out of reach to buy.
In the long term, it makes sense to buy a property for security and peace of mind - and to ensure you don't get left behind when prices inevitably rise again.
Liz Koh is a financial adviser. Her disclosure statement can be obtained free of charge by calling 0800 273 847.
www.moneymax.co.nz
