The value of home ownership over renting in 2020
Kiwi homeowners in 2020 are better protected from financial adversity than renters16 September 2020
1/6 Newcastle Terrace, Mount Albert, Auckland
If you were umming and ahhing about whether to buy or to continue renting before the pandemic hit in 2020, you may well be feeling more inspired about home ownership in the low interest environment if your income has remained stable and you have a deposit saved.
The argument for owning over renting has strengthened in a year when interest rates are at an all time low, making it, in a number of cases, cheaper to own a property than to rent it.
John Bolton, head of Squirrel Mortgages, says homeowners have done demonstrably better from the Government and the Reserve Bank than renters during this year’s pandemic. Mortgage deferrals have effectively let people “live in their houses for free,” for a period, says Mr Bolton.
Meanwhile, though rent increases have been frozen since lockdown until 25 September, a number of landlords are now planning to put rents up, according to media reports.
If you have any way of accumulating a deposit to buy a home, now is the time to do it, say a growing number of real estate commentators. Mortgages are a form of forced savings, says Mr Bolton.
“You’ve also got to remember, if you’re paying an interest rate of 2.5% and the property is going up in value on average by 3.5% or 4% annually, then you’re actually living for free and building up equity in the property at the same time,” says Mr Bolton.
Home ownership gives a feeling of genuine security, of having a roof over your head, rather than renting, says Mr Bolton. And this is something first home buyers are truly realising at the moment, he says.
If you’re a homeowner, the bank will be more open to lend for your business
There are a number of perks to being a homeowner rather than a renter. A very real one in this tough economic climate, is you can use the security of your home to help borrow for your business. If you have a partner earning a salary, you might also be able to set up a new business or buy a new business using some of the equity you have built up in your home.
Loan Market mortgage adviser, Mikey Smith says: “Getting a bank loan if you own a business without a home is extremely difficult. If you don’t have your home to use as security, then good luck,” he says.
The biggest advantage for business owners with a home is that, rather than paying personal loan rates of between 7% to 15%, the finance can come from your home loan, says Mr Smith. You can structure a loan for the business over five years at 2.49% which is a huge advantage, he says.
If you’re a long term renter thinking of buying you not only have the incentive of low interest rates but also for those millennials among you, your KiwiSaver is maturing to levels of between $60,000 and $100,000 which is a very useful contribution to a deposit.
Friends might think of buying together to make the finances stack up. And the trend for parents and grandparents “gifting” their grown up children a contribution towards a home deposit is also gathering pace, says the Loan Market mortgage adviser. He says he’s seeing a “massive amount” of gifting going on in families since lockdown finished.
What are rents likely to be doing in 15 years time?
A key question Mr Smith asks renters considering buying, is: ”In 15 years, do you think you’ll be paying the same rent as today?” Probably not, it’s likely to be higher,” he tells them. While your mortgage payment is likely to be lower in relation to your income, he says.
The problem with renting is you have no control over any part of it, he adds. Whereas, if you’re paying a mortgage, you can always extend the term of the loan so that your payments are less, or you can pay interest only for a period, he says. You have options. And as your income rises, your mortgage will seem more and more affordable.
It seems likely that low interest rates will stay low for a good five years possibly even 10, adds Mr Smith.
And while banks would still prefer you to have a 20% house deposit even during a time when the Reserve Bank has lifted LVR restrictions, it could be worth talking to a mortgage adviser about what is possible.
If you’re making a lower deposit you’ll likely pay a low equity margin on the interest rate but then a bit on top, say 0.25% if you have a 15% deposit or 0.75% if you have a 10% deposit, says the mortgage adviser. Some banks will just charge a fee, it tends to be done on a case by case basis depending on your income capacity, says Mr Smith.
“If you’ve got a 17% deposit with 3% to go it can still be worth getting on the ladder and setting up a first year of payment plan to cover the 3% which could be an extra $100 a week,” he says. What a lot of people do is rent out a room to help cover this extra expense for a year or two.
“It’s pretty standard to charge a couple of hundred dollars a week for a room, “ he adds.
Properties can be more expensive to rent than to own
This Mt Albert property being marketed by Ray White’s Tim Hawes and Mark Prunty, is a good example of a home which would cost renters around $750 a week and your mortgage payments would be very similar, depending on what your deposit is.
1/6 Newcastle Terrace, Mount Albert, Auckland
Mr Hawes says he marketed a one bedroom unit in Western Springs earlier this year and pre-Covid couldn’t sell it for a price the seller wanted, with offers getting to $530,000. By the end of the campaign, post-lockdown, thanks to lower interest rates, the property turned cashflow positive and it sold for $560,000.
“In other words, the tenants were paying $100 more a week rent than if they bought it,” he explains. With low interest rates, there are many examples of a home costing less to buy than to rent as long as you have the deposit, he says.
The Ray White agent thinks the message is getting through to renters with good savings. He talked to a landlord whose tenant had given notice to go and buy after 11 years of renting.
“I would be doing everything possible to try and buy a house at the moment,” says Mr Hawes, who deals with high earning executives who have been renting for years. He’s telling them, prices are not going to abate, there are too many people out looking.
Even if you want to start with an investment property, with low interest rates you can pay down debt on an investment property with tenants contributing, he says.
Homeownership in New Zealand is financially advantaged
Homeownership is financially advantaged in New Zealand, says Westpac chief economist Dominick Stephens.
Owning a home is great for people with a lot of savings, but for people borrowing a lot, it’s a risky proposition, he warns.
Homeownership is a heavily tax-advantaged proposition in New Zealand, he explains.
“If looking at homeownership on a wealth accumulation basis, it's the only way to accumulate wealth where you’re not taxed at all, it’s what distinguishes homeownership from all other investments,”says Mr Stephens.
“Our tax system benefits those with enough resources to get on the property ladder,” he says.
Trade Me Property recently reported a 9% increase in the national average asking price in the year to July, the biggest percentage increase in three years.
The Westpac chief economist, after initially saying that house prices would drop this year due to the pandemic, is now forecasting a 6.3% rise in house prices in 2020 and 8% next year.