[Chiba]

Given the frankly horrific interest rates in NZ, I've been doing some research into the benefits of renting versus buying. Seems like renting is a better option financially.

Here's a little calculator:

Rent vs Buy Calculator (http://partners.leadfusion.com/tools/motleyfool/home10/tool.fcs)

This is USD based, but should work equally well anywhere. Can anyone provide me with some NZ-centric guesstimates for this, just to see how the numbers come out?

Some articles:

Renting vs Buying - The Realities (Get Rich Slowly) (http://www.getrichslowly.org/blog/2007/07/16/renting-vs-buying-the-realities-of-home-buying/)

The Worst Investment Ever? (Motley Fool) (http://www.fool.com/personal-finance/home/2007/05/18/the-worst-investment-ever.aspx)

Rent Or Buy (Motley Fool) (http://www.fool.com/personal-finance/home/2007/01/23/rent-or-buy.aspx)

Any comments? There are, of course, any number of other justifications for buying a place, but for the sake of this discussion I just want to consider the cold financial facts.

[jess]

NZ rent vs. buy calculator (http://www.theshapeofmoney.co.nz/general-resources/calculators/rent-versus-buy-calculator.asp)

[Chiba]

Thanks Jess! Interesting. If I just leave the numbers in as-is and switch the interest rate from the preset 7.6% to 9%, which is still low by current NZ standards, then it's better to rent. Of course, I'm not really in a position to tell whether the rest of the numbers are sensible. They look OK, but...

[jess]

I don't know a lot about this stuff, but the 2% capital growth rate looks too low. It could change completely in future of course, but at the moment my property is increasing in value by a good bit more than 2% annually.

[StevieD]

But, these things are like anything and can change dramatically.

Good articles though, very thought provoking. Having looked at the figures for a mortgage at the moment, renting looks by far the better option for now.

[barryp]

I wouldn't assume an aggressive REAL growth rate, especially given the ridiculous cost of money and small growth in the number of buyers. We're actually seeing declines in some markets now, and the rapid appreciation times (2% per month!) are over for quite awhile.

I really like that calculator - because it incorporates opportunity costs using the down payment to secure a house, and because it includes the costs you will incur in selling it later. (It's a fair comparison, unlike more than a few biased and/or simplistic calculators you might find on the web.)

In general it *is* economically better to rent in NZ, as the rent/salary mismatch is painful but the mortgage/salary mismatch is worse. We don't always buy for best NPV, though.

[Chiba]

I don't know a lot about this stuff, but the 2% capital growth rate looks too low. It could change completely in future of course, but at the moment my property is increasing in value by a good bit more than 2% annually.

Over a longer period property price increases don't match the equities market.

There are some government stats on house prices here (http://www.stats.govt.nz/tables/ltds/ltds-prices.htm).

Having done some quick maths, the average growth between 1991 and 2003 on an average urban property was 6%. Long term the market will get you 8-10%.

Sticking with the calculator's preset numbers, but now having looked up BNZ's current interest rate (9.99%), and assuming the calculated 6% growth rate, then you're better off buying. Good news!

Refining things further though...

Any idea what NZ's inflation rate is? I wonder what "Investment Rate (Post-Tax)" means? I think that's where my 8-10% should go, but I don't know what NZ capital gains tax on investments is. I think I remember reading 40%, but I don't want to guess.

This is kind of fun! :)

[jess]

But, these things are like anything and can change dramatically. So true. I could put in the annual real growth rate of 5% given my previous year, but anything for the future is just my guess and opinion. That NZ calculator will tell you buy or rent based on anywhere from 1 to 15 years, but the 1 year forecast would be a heck of a lot more reliable than the long term!

Having done some quick maths, the average growth between 1991 and 2003 on an average urban property was 6%. Long term the market will get you 8-10%. The stock market has not been that kind to me. Not 10% kind, at least.

My mortgage interest rate is luckily 8.0 (I can't believe I'm saying luckily about that... but that's another future variable - we'll see where it is down the road when I need to refinance...) :uhoh

[Chiba]

So true. I could put in the annual real growth rate of 5% given my previous year, but anything for the future is just my guess and opinion. That NZ calculator will tell you buy or rent based on anywhere from 1 to 15 years, but the 1 year forecast would be a heck of a lot more reliable than the long term!

The stock market has not been that kind to me. Not 10% kind, at least.

Don't think short term, (edit: unless you're an expert, professional or not) it's a mugs game (and guess which industry I work in). Think 20 years. That's not an atypical mortgage term, and it's the kind of scale necessary to smooth out market spikes. Fortunately for us, NZ's statistics are all in the public domain and easy to access.

[jess]

Don't think short term, it's a mugs game (and guess which industry I work in). Think 20 years. That's not an atypical mortgage term, and it's the kind of scale necessary to smooth out market spikes. Fortunately for us, NZ's statistics are all in the public domain and easy to access.We've had $ in the market over 14 years. I tend to hold fairly safe stocks which is part of the reason - not something I'm willing to change, but that's another issue. Our mortgage is for 15 years. I like to believe I do think longterm, but certainly any calculator is going to be less reliable the further out you expect it to go, which is what I meant by the 1 year forecast.

[ruthyroo]

Anyone got any ideas on what long term investments are alternatives to property in New Zealand? I've developed an impression that investing in the stock market is just not done here to an extent that the supporting industry exists - and certainly I''m not aware of any tax-related incentives provided by the Govt to encourage people to invest anywhere other than property - but I don't know if that is true.

how do kiwis invest in stocks and shares?

[Tia Maria]

We had to buy as the rental stock where we were living was so low and so poor that we simply couldn't find a rental.

I am glad we were forced to as I know in Devonport if we had rented for a year we would not have been able to buy the same house the following year as the local market has increased so dramatically. We live in a very popular area and I have seen a few people priced out of the market in the last year.

The other problem in our area is that as houses are selling for such high prices people are choosing to sell their rental investments which is putting a lot of local families in a tricky situation as they are all having to find new family sized rentals, which is obviously getting harder and harder.

So whether to rent or buy is more than just a numbers game for most, especially if you want to live in a particular area or stay in a school zone or just if you want the reassurance that your landlord won't sell your rental house.

Obviously if you can be flexible and research an area fully then it can be for the best and it was always our initial plan to rent while we were seeing if we liked New Zealand.

Cheers

Tia

[Howie]

I would love to buy instead of rent for purely emotional (not financial) reasons. However, the simple reality is that I cannot afford to buy in NZ. I earn a good salary (I believe it's actually higher than the average Auckland household income) and I can almost manage rent on my run down 3 bedroom house (in Howick). I just ran the numbers and if I were to pay a mortgage instead of my rent, I could afford a $200,000 property. Now I don't need a big place or a nice place, just something small for me and my 2 dogs. But I don't think I'll find that for $200,000. :(

[Chiba]

I...I could afford a $200,000 property. Now I don't need a big place or a nice place, just something small for me and my 2 dogs. But I don't think I'll find that for $200,000. :(

Go in with a friend or two for a few years in a good area and pray to whatever deity you believe in, or whatever else, that your equity increases in value. Then sell up and go solo in a cheaper area. That's a London model, apparently...

[Caroline and Dave]

This is a very good book here
http://www.fishpond.co.nz/Books/Home_Garden/Homes/General/product_info/9092283/

It explains how renting can work for you in New Zealand and can be sent anywhere in the world.