Owning vs renting in New Zealand – which is cheaper?
At some point in their lives, Kiwis will be asking this question.
Whenever first-time buyers run their sums, they are often surprised that owning a home can be much more expensive than renting one. Not only do they have to shoulder the weight of a hefty mortgage, but they also have to pay local council rates, insurance, and maintenance costs - all of which the landlord pays if they rent.
So what is cheaper - owning or renting? The answer depends. Owning costs less but only over time. To illustrate this, let’s use a property that’s currently on the market for rent for $650 a week. It’s a three-bedroom, one-bathroom brick-and-tile house in South Auckland.
Let’s say you decide to rent it, then the landlord offers to sell it to you. According to the OneRoof valuation, the property is worth $965,000, which is more than what the average Aucklander spends on their first home but is close to the average Auckland sale price.
Most home buyers need a 20% deposit, so based on the OneRoof estimate that’s $193,000 you’d need to save. And although you could rent the property for $650 a week, it’d cost around $1125 a week to own. That’s because it’s not just your $1010 mortgage repayment you need to worry about. Your council rates can easily cost $63 a week and your insurance and maintenance costs are another $52 a week.
So, initially, owning this property might cost $475 more per week than renting it.
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But renting becomes more expensive than owning over time. That’s because rents tend to go up over time, but your mortgage repayment stays the same (as long as your interest rate doesn’t change). Sure, the cost of rates, insurance, and maintenance keep going up, but overall, the cost of renting tends to rise faster than the cost of owning a property.
So, at some point, renting starts to cost more. In this example, after about 14 years, renting becomes more expensive than owning this property, in terms of the actual money coming out of your bank account.
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Once you eventually pay off your mortgage, the cost of owning drops considerably. This sounds obvious. But putting numbers around it makes the principle clearer. This is the reason why retirees who rent struggle much more than retirees who have paid off their mortgages.
So, how long does it usually take for owning to become cheaper than renting?
More affordable properties tend to become cheaper to own more quickly. Expensive properties tend to take longer for owning to pay off. That’s because as properties get more expensive, landlords can’t charge as much rent.
So, an affordable townhouse in Christchurch might take eight years for owning to become cheaper than renting. But, an expensive mansion in Remuera will take much, much longer.
Ultimately, these numbers aren’t bulletproof. If interest rates fall, then homeowners’ mortgages become cheaper. That brings down the cost of owning, while renters often still face rising rents. So when interest rates fall owning becomes cheaper sooner. On the other hand, when interest rates rise, mortgage repayments often rise faster than rents. So owning takes longer to pay off.
It’s important to point out that these numbers haven’t factored in the potential increase in wealth from your property increasing in value, or the mortgage going down. They also don’t include what happens if you rent and have invested any extra cash in shares.
That’s because ultimately, the decision about whether to own or rent comes down to more than just the sums on a specific property.
There are practical considerations, like whether you can get the deposit together, and if you are willing to live in the properties you can afford. But there are also psychological impacts. For example, you may feel more secure knowing that a property investor can’t give you notice to move out.
- Ed McKnight is the economist at property investment company Opes Partners
At some point in their lives, Kiwis will be asking this question.
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