Rent vs Buy

Buy Example

Firstly, I would like to run through an example on a real house in Te Awamutu and compare this with renting since it is local to me and feels the most simple to analyse.

Here is the property in question and just in case the link stops working I'll include a screenshot of the listing and some basic details:

This 1930's property has 3 internal bedrooms with self-contained granny flat in the backyard. The bathroom, laundry, and second toilet have been newly renovated but the kitchen is still original and the house has an awful green carpet throughout. Needless to say most people would want to do some work to it to make it nicer but it's technically liveable as is.

Mortgage Calculator

I'm using the Co-Operative bank mortgage calculator with the following inputs:

• Property price: $609,000
• Deposit: 20% ($121,800)
• Interest rate: 5.99% (current one year fixed)
• Term: 30 years

Calculating Affordability

This gives us a weekly repayment of $670.59. How do we know this is affordable/good/bad? Based on a long-standing personal finance rule called the 28/36 rule your regular housing costs should not be more than 28% of your gross income. This includes mortgage payments, property taxes, and insurance and any other regular costs directly related to the mortgage. The 36% rule is the same but includes all debt payments (credit cards, buy now pay later, car debt etc).

• Weekly repayment: $670.59
• Affordability Rule: 28/36

To give owning the best possible chance and to keep things simple, I'm going to exclude the costs of rates and insurance and assume we have no other debts. Therefore, working backwards from the mortgage payment we should be able to calculate what our gross income needs to be to comfortably afford this mortgage.

• Gross yearly income needed: $124,880.28
• Multiplier: 186x weekly mortgage payment
• Equation: $670.59/7*365/28%

New Zealand has a progressive income tax system so I wanted to know how much this gross income would be after tax and especially how that compares to the mortgage payment. PAYE.co.nz is a great tool to calculate this since it includes not only income taxes but also ACC, KiwiSaver and student loan deductions if you have any and gives you the take home amount in any frequency you want.

• % of Net income (after PAYE, ACC): 38%
• % of Net income (after PAYE, ACC, KiwiSaver at 3%): 39.6%
• % of Net income (after PAYE, ACC, KiwiSaver at 3%, Student Loans): 45.9%

But what about on two incomes? The idea being that you would be less burdened by tax, each income only having to cover half the mortgage payment.

• Repayment per income to cover: $335.30
• Required gross income each: $62,365.80
• % of Net income (after PAYE, ACC): 34.2%
• % of Net income (after PAYE, ACC, KiwiSaver at 3%): 35.5%
• % of Net income (after PAYE, ACC, KiwiSaver at 3%, Student Loans): 39.1%

Buy Summary

So actually, on two incomes the affordability is not that much better, improving by 4-6% depending on your situation. Remembering that I have not included any of the other costs you would usually include in your regular housing expense to give the buy situation the best possible chance.

Also, I would argue that after tax, paying close to 40% of your income on purely the mortgage payment is insane. That means likely your basic housing cost will be over 50% before any groceries, petrol or other necessary expenses. Some might say that not all of this money is going toward interest and so some of it could be considered savings. This is true, however, based on the parameters you put in only in year 19 will you start to pay more in principal than interest. I used the sorted mortgage repayment calculator.

If you limited your mortgage payment to only 25% of your net income, what would that look like?

• After tax income required: $2,682.36 per week
• Gross income required (single): $209,000
• After tax per income (two): $1,341.18
• Gross income required (two): $96,000

How does this stack up to realistic incomes in NZ? According to Stats NZ the median weekly income for June 2024 quarter was $1,343 or $70,027.86 per year. A far cry from the $96,000 required to affordably buy this house. On top of this, we are considering a entry level house in a small town in the Waikato, making these types of incomes even less likely.

Renting Example

OK, but you might retort, well it's still better than renting right? When you're renting you are just paying someone else's mortgage? Firstly, I want to dispel this myth on the basis of logic. When you buy a meal at a restaurant no one ever complains that they're paying the restaurant owner's mortgage. In the same way that in the restaurant you are paying for a food service, when you rent you are getting a housing service with many conveniences not afforded to owners.

Next, lets look at what you could rent with those same incomes spending the same amount on rent as you did on your mortgage. To give renting the worst possible chance, I'm not going to add any allowances that represent the insurance and rates you would have to pay in the buy situation.

• Available to spend on rent: $670.59

I'm going to use TradeMe to estimate the percentage of properties with 3 bedrooms in various areas that you could afford.

• Waipa district: 11/26 (42%)
• Hamilton: 113/162 (70%)
• Auckland City: 180/653 (28%)
• North Shore City: 97/224 (43%)

Let's compare this to how many houses you could afford to buy in the same areas with $609,000.

• Waipa District: 40/232 (17%)
• Hamilton: 111/481 (23%)
• Auckland City: 55/843 (6%)
• North Shore City: 16/553 (3%)

Renting Summary

So based on these numbers you have 2.5x, 3x, 4.7x and 14.3x times as many options in each area respectively when renting compared to buying if your only goal is to get somewhere to live. Having more options available and being more flexible means you are able to move for your job more easily, always only get as much house as you need for the time (single, married, with kids) and not have to deal with all the responsibilities that come with owning. If you only really need 2 bedrooms for example, your rent may come down by $100-200 a week which could be further invested or used for lifestyle expenses whilst when you own, you are probably going to try to future proof the amount of space you need.

Hidden Costs of Buying

On top of all this, most people do not buy a house and stay in it for 30 years paying it off, they will move every couple years (9.2 years according to some estimates). Every time you do this you incur real estate fees, legal fees and potentially taxes. They will also usually take on some extra debt on the mortgage for renovations, holidays, buying a car, jet ski etc. Additionally, maintenance costs on old, affordable homes like the one in this example are much more than most people realise. For example replacing the roof would likely cost at least $20,000 with no value added to the property, it would be required to maintain its value and keep it sell-able.

Maintenance

Based on a good rule of thumb of 1% for maintenance and assuming no price appreciation of the house, this adds $6090 per year on top of your mortgage payment. Which is $117 per week.

• Maintenance cost estimate: 1% of house value per year
• Per year maintenance (no price appreciation): $6090
• Maintenance cost per week: $117

Adding this maintenance cost alone to your available amount for renting gives you $787 per week of budget which in Auckland city allows you to afford 290/653 (44%) 3 bedroom houses which is a 16% improvement in options available to you. I would also hazard a guess that the quality of house you can get whilst renting is likely to be higher than an equivalent bought home (just speculation).

Conclusion

There are definitely some limitations with my analysis. I did not take into account the paper gains of owning a house nor compare that to renting and investing the difference. My general belief is that for every situation that you could own a home and make a return on it, you could find an equivalent renting situation and gain better returns by investing (this could even be investing in property by the way). Opes Partners do a great video that shows this in a simple way for the New Zealand context.

I will also hazard a guess that for a large majority of people, owning their own home is much more of an emotional decision than it is a financial one and so none of these numbers will really change their minds which is totally fine. If you are not in that camp and would like to consider the financial impacts of buying a home in New Zealand my #1 take away for you is to RUN THE NUMBERS ON THE LARGEST PURCHASE OF YOUR LIFE as Ramit Sethi has become famous for saying. He doesn't own a house even though he is multi-millionaire, and he says the day he does buy a house, it will be the worst financial decision he ever made but it will have been worth it.

What about me? Needless to say, I won't be buying a house any time soon and especially not in New Zealand, at least not as a place to live. This is mostly due to the fact that early on in my career I need to be flexible and be able to move to where the jobs are. Additionally, based on my current level of savings and income, it simply would not be viable to buy a house (the bank won't lend to me) so it's a pretty easy decision right now and I'm perfectly happy with it.