One of our clients recently asked me if they should be renting or striving to buy a home. They weren't too sure if buying a house was such a smart way of increasing their wealth given the recent state of the property market and the way property had decreased in areas such as Christchurch. They also wanted to know what other options of investing they had if they weren't going down the property route. Very clever questions I thought and definitely topics that made me use my little grey cells.
Before I tackle this question you need to know I'm not a financial advisor and the following are simply my own comments and feelings on the subject of buying verse renting a home.
It's the Kiwi dream
Owning a home is something that everyone strives for – right? Not necessarily true. It all rests on your values and dreams and the assumptions you make about a whole host of things so numerous I'd have to write a book just to cover them off. In general terms, however, the answer to this question depends upon personality, psychology and numerical factors. So in an effort to light the way, here is a list of pros and cons about climbing on board the property ladder.
Pros for owing a home
- Rent can, and usually does, increase over time. Mortgage payments on the other hand, tend to stay stable as most people have fixed term mortgages for 2 to 5 years. This means some degree of money certainty is able to be achieved if you own a home rather than renting one and being at the mercy of the landlord.
- Making mortgage repayments is in a way, an enforced savings plan. This is because over time, the amount of money you owe the bank for your mortgage, decreases. Conversely, your equity in the home increases.
- If the property market moves upwards, you get to increase your equity in the home over and above the mortgage repayments you have made.
- Mortgage repayments eventually come to an end once the loan is repaid back to the bank. Rental payments are like Energizer Bunnies – they just keep going on and on so long as you are renting the property.
- One you have some equity in your home, you can use it as leverage and buy other assets which lead to increasing your wealth,` such as businesses or houses.
- Already having a stake in the property market means you are unlikely to be priced out of the market.
- If certainty is important to you, then owning your home will be a more comfortable concept than renting and being at the mercy of a landlord who may wish to increase rental prices or sell the property and subsequently ask you to leave the property.
- Owning a home means you get to play King and Queen of the Castle. You can do what you like with it, within reason. If you want to paint the kitchen red and lay green carpet throughout the place, then you're free to do so without asking anyone else's permission.
- Being able to make improvements to home tends to add capital value to a property, meaning your equity increases.
- Lastly, when you buy a home, your interests and priorities and values often change. These you pass onto your children. You start to buy into society norms such as peace and good model citizen behaviour. Children tend to copy their parents so if you want to build strong citizenry and consequently, strong communities, homeownership is the way to go.
Cons for owing a home
- As our reader pointed out, if the property market falls then your home has decreased in value. This means your wealth overall has taken a bit of a dive. But note your wealth on paper may have decreased but that decrease in equity won't be realised if you don't sell the property.
- If the property market doesn't increase, your money won't see capital gains. Accordingly, it might be better invested in other things such as shares.
- High mortgage repayments may mean you don't have a lot of surplus income to play with. Overall, this could mean a lesser lifestyle than what you might have otherwise been able to enjoy if you were paying less rent than what your mortgage repayments are.
- It's hard to argue that annual insurance and rate payments lead to an increase in overall wealth. Despite this, if you own the home these payments have to be made.
Pros for renting a home
- Rental prices can be less than the initial mortgage repayments you make. This means there's more money to spend on life's luxuries such as good vino and holidays.
- Money can be saved, as you won't have to worry or pay for rates, insurances and annual maintenance.
- Not having a stake in the property market means your balance sheet won't be subject to any decrease in prices this market experiences.
- If you take the money you would have spent on every single mortgage repayment and put that money into something else, such as shares or a business, your wealth might increase just as much (maybe even more) as it would have done if invested in real estate.
- If you haven't already purchased a home and you have saved and the property market has dropped, you may be able to afford more house than if you'd purchased earlier on when prices were high.
- If you don't like the new neighbours, you can often move location quicker than if you had a home to sell.
Cons for renting a home
- You are always at the landlord's mercy with respect to rental increases they may want to make.
- There is a large degree of uncertainty involved, as the landlord may sell and you may be asked to vacate.
- Talking of renovations, generally speaking landlords don't allow you to rip out the kitchen and paint the house any colour you want.
- If house prices do increase, you can be priced out of the market because salaries don't keep up with those property price increases experienced.
- Unfortunately most people don't put aside every single month what they would have paid in mortgage repayments. Accordingly, their wealth does not increase.
- No house means no asset to leverage off of. This translates to you being inhibited to a large degree in building your wealth as you have no asset to pledge as security to buy a business or some other form of investment.
- No home means no property to pass onto your children.
Where's the property market now?
I won't go into too much detail here. Suffice it to say that we have a shortage of houses which will ultimately push prices up. But there's a caveat. House prices can only increase so much. In order for them to move up, the population have to have money in their pockets to pay for those increased prices. To put a person in this position they generally have to have a job. So only buy a home in an area where there is an undersupply of housing and employment. Cities clearly fall into this category. This is why houses in certain parts of Auckland have increased their prices over and above that which they would have fetched in 2007, which was the height of the property market, whilst other houses in New Zealand are still suffering below 2007 prices.
What else is on offer?
On the basis that you don't put your moo la into property, how exactly do you grow your wealth? Good question. In general, you could try shares, bonds, managed funds or commodities such as coffee, gold, or silver to name but a few of the main categories of investments. Actually, even if you do get into property, I still think you should look at putting your gold coins into these categories because diversification is one very important factor of wealth creation. Be careful in this area though, as there are lots of sharks out there.
No one has all the answers. We can only make a judgement call and often we either under call or over call our hands. To assist, we can look at historical data and carry out some forecasting.
If I was trying to decide whether to buy or rent, I'd probably buy. I'd do some solid research on the suburb I was looking at and really get to grips with the market in that suburb, including prices. But I wouldn't just buy because of the numbers. I'd buy because I like certainty and enjoy homeownership. I like being able to swing half a cat around my Parnell chicken hutch.
I'd also keep in mind they aren't making any more land darlin' so in the long run (10 years or more), I'd expect to make a capital gain on my home. But my wealth plan wouldn't stop there. Additionally, I'd put some money into KiwiSaver and shares and cash so I'd have most bases covered. Buying Lotto tickets would also be a regular investment feature as well!
The dominant feature I'd put into practice is getting a money plan. Checking where I am now and where I want to go. We're pretty good at that here at Gilligan Rowe & Associates. Money is our business after all. If you need help with this, please let us know - phone +64 9 522 7955, [email protected] or via our website. Happy to help.
In the interim, spend short and invest long as the Russian Money Barons say.