By Lisa Dudson|
We have decided not to buy a house and that we are better off renting and saving some extra money. Have we made the right decision?
Answer: For most people, their home is the most significant asset they will own in their lifetime. Not only does owning your home provide shelter, but also through mortgage repayments it provides a compulsory form of saving. In the last 20 years or so in New Zealand, home ownership has dropped from around 75 percent to close to 67 percent. Statistically speaking that is quite a significant drop. The trend seems to indicate that the number of Kiwis owning their own home is continuing to decline.
Today we live in a more transient society. People move around a lot more with their jobs, are getting married later and want more flexibility with living arrangements. There also doesn't seem to be as much emphasis on the importance of having your own home. Longterm renting is becoming more and more common. A concerning reason for this trend is that it is becoming increasingly difficult to afford to buy a home, to save for the deposit and be able to afford the mortgage repayments, especially in the major cities and more desirable and expensive areas. Housing affordability has increased from 60 percent of our income to 130 percent of income over the last couple of decades. This basically means it's more expensive for us to afford to buy a house than it was in our parents' generation.
Let's look at an example:
Buying a home: you purchase a home for $250,000, with a $50,000 deposit and a mortgage of $200,000 for 25 years. Your monthly repayments would be $1543, assuming an interest rate of eight percent. In 25 years, assuming an average capital growth rate of five percent, your home will be worth $870,322.
Now, before you fall off your chair, note that we are talking 25 years and that inflation will account for approximately half this increase in value.
Saving and renting: to be in the same place financially as buying a home, you would need to pay your weekly rent and save $1500 each month for 25 years, assuming five percent annual growth without missing one payment. This would give you a total of $902,208 (similar to the amount of value you would have in a home).
In a small number of cases you may be financially better off renting than buying your own home, providing you invest regularly so you accumulate a similar amount of money to what a freehold home would be worth, 25 years or so in the future. The reality is, however, that most people don't have the discipline to do this and will therefore be better off buying a house and paying off the mortgage.