Housing advice still stands, despite rising prices

Renting rather than buying may be the smartest financial decision you can make at present.

In 2012, New Zealand Institute of Economic Research (NZIER) economist Shamubeel Eaqub told the Herald on Sunday that he urged his friends not to waste their money buying houses, particularly in Auckland. "Houses are expensive compared to renting," he said at the time. "New Zealanders' obsession with property is madness."

Fast-forward two years and Auckland prices have increased from a median $500,000 to $637,000 and his view hasn't changed. Buying a house probably wasn't a good financial decision then and the situation is even worse now.

"When you buy a house, you have to be careful about weighing up what you're doing," he said this week. "Is it a sound financial decision? People might buy a house for other non-financial reasons, and that's fine. But if you're going to make the biggest financial decision of your life, you need to be realistic about what you are getting into."


Capital gains won't last forever, he said. "Increases only matter if you're going to sell. Do you think prices will rise at the same pace for the next 30 years?"

Most Auckland houses don't stack up, he said. You can get a rough idea of how a house works as an investment by its gross yield, which is determined by the annual rental income as a percentage of the property's sale price.

So a Glenfield house bought at the current REINZ median of $584,500 and rented for the Crockers 2013 median for a three-bedroom house of $469 would have a rental yield of 4.17 per cent. This doesn't take into account costs such as insurance, repairs, maintenance or debt funding.

Sandringham, with a median price of $690,000 and median rent of $503, offers 3.8 per cent.

If you put that money into a term deposit, you could get about 4 per cent in interest every year, and in shares in recent years, you would have gotten double-digit returns.

Eaqub said it made sense to buy only if you're going to get capital gains. "If you get a rental yield of 3 per cent but you expect an 8 per cent increase in house prices every year forever, it's a good investment. But that's a big ask.

"Auckland has been through an unusual period of sharp rises over the past 10 to 15 years. As we've seen in other parts of New Zealand and around the world, it can turn around. The price you pay is the most important thing."

And rising interest rates will make a mortgage more expensive.

If that Sandringham house has a mortgage of $500,000, it costs $42,978 in annual mortgage repayments at 6 per cent on a 20-year loan. The median three-bedroom rent would cost just $24,388.

Renting in retirement is not a prospect that appeals to many. But Eaqub said if people were disciplined about saving the difference between rent and a would-be mortgage, they could set themselves up with a solid investment for their retirement.

NZ Property Investors Federation president Andrew King agreed renting seemed to be a money saver.

His organisation worked out it was $138-a-week cheaper to rent a house in New Zealand than to own.

"At the middle of last year, it was $102 so it's getting worse. When interest rates take off, the cost of home ownership will get even higher. Most potential first-home buyers will look at the numbers and make a decision to keep renting."

But he said long-term it made sense for most people to buy. Rents had been fairly stagnant but there were signs they are rising.

A recent Crockers report showed rental price growth in the Auckland region had reached a 22-month high of 5.3 per cent a year.

"Rents are probably too cheap at the moment," King said.

People who bought would lock in a house at today's prices, which would eventually work out cheaper than renting, he said.

"But it could take a while. House prices will probably carry on going up for another year or two so it's probably a good time to do it."

He said the best decision a lot of people could make would be to live in the cheapest house they could and save as big a deposit as possible.

Rental owner content to sit tight — for now

Sharon Trafford owns rental properties in South Auckland but rents her North Shore home.

"I couldn't afford to buy here at the moment. It's too overpriced."

She didn't want to move because her children were at school. She hoped that by building up her business and working on her investment property portfolio, she could get into a position where she would be able to buy a home. She said a lot of people were planning to wait until prices plateaued, when they could get a better deal.

"Otherwise if interest rates rise, you could be left with an overpriced property you can't afford."