by Alister Helm, posted 7 June 2019 on www.properazzi.co.nz
This is a simple question, but unfortunately it does not have a simple answer.
I was prompted to try and answer the question when I was contacted Susan Edmunds a journalist working with Stuff. I personally love to be asked these type of questions as they prompt me to delve into the data and seek out trends and insights.
The reality is .. it depends. It depends where you live, if you have a deposit, if you intend to live in the property for any length of time, how much you want to do to maintain the property, if you care about what place you live in, and so on. The provisos are endless and that is partly why there is no simple answer.
However you can apply a simple logic to the available data on sales prices and rents to at least provide an insight and that is what I have set out to do.
The approach I have taken is to keep it as simple as possible. I’ve posed the question, for a particular region of the country how much would you have paid in annual rent for the typical average property at a certain time over the past 19 years, and compared that with the pure cost of interest for a 2 year fixed term mortgage based on the median sales price for a typical property in the area at that same time. I have made a consistent assumption that the cost of buying the typical property would be with a 20% deposit. Sure this decreases the interest costs but as I have said I have tried to take a purely hypothetical and simple approach. I’ve then expressed this rental cost as a percentage of the mortgage cost. If the rent is less than the mortgage cost then it’s cheaper to rent and visa versa.
As a reference to the source of data, I have used the median sale price of all properties each month in each region based on the sales data from the Real Estate Institute of NZ. I’ve then applied the 2 year fixed interest mortgage rate from the Reserve Bank of NZ data, and I’ve used the Ministry of Business, Innovation & Employment who track the weekly rent based on bond data.
I know this methodology is way too simplistic, there are far more accurate calculations that would factor in the interest earned on the same deposit if you chose to rent, naturally also the value of any capital appreciation matched to maintenance and enhancement costs. Then there is the disturbance factor allied to the uncertainty of tenure of rent. I’ve also used large aggregated data sets whereas in a suburb the specifics of buying a 2 bedroom house as compared to renting a 2 bedroom house may well be massively different to the typical house within a city or region. As I say there are as many different ways to calculate this decision as there are rental properties.
Detailed below are the analysis of 13 regions of the country, all spanning the period from 2000 to 2019. The results are in someways surprising (I am not sure quite what I expected to find) and certainly interesting.
Starting at the top of the North Island with Northland the situation in April 2019 is that it is 4% cheaper to buy than to rent. The currently weekly rent is $388. The total rental cost per year then is $20,176 this compares to the current mortgage at 4.8% of a median sale price property of $507,000 equating to an annual interest charge of $19,469 – 4% cheaper to buy than rent.Over the past 19 years the situation has certainly changed with the period from 2003 through to 2012 favouring renting, however since then the cheaper option has been to buy.
It probably comes as no great surprise that the Auckland market favours renting. At this time it’s 11% cheaper to rent than to buy, with the median weekly rent at $561 equating to an annual rental cost of $29,172 vs. the interest component of the mortgage for a median sale priced property of $850,000 equating to $32,640.
The Waikato region is currently hovering around the mid-point indicating that it’s a tough call based on the median weekly rent of $401 equating to an annual rental cost of $20,852 vs the mortgage interest cost on the median house price in April of $550,000 resulting in an interest cost of $21,120.
Whilst the past 3 years has seen it cheaper to rent than to buy in the Bay of Plenty the last few months has seen this bias to renting decline as house prices hav plateaued and rents have continued to edge up. In April the median weekly rent of $440 equating to an annual rental cost of $22,880 vs the mortgage interest cost on the median house price in April of $600,000 resulting in an interest cost of $23,040.
The Hawkes Bay region is pretty consistent in its data showing that it is cheaper to buy than to rent. This has been the situation for most of this century with only the period in the early years of the 2000’s when house prices rose on the back of relatively high interest rates. Since the GFC the low interest rates have favoured buying.
In April the median weekly rent of $399 equating to an annual rental cost of $20,748 vs the mortgage interest cost on the median house price in April of $465,000 resulting in an interest cost of $17,856, making it 16% cheaper to buy than to rent.
As of the data for April it is 21% cheaper to buy in the Taranaki region than to rent and this bias to buying over renting based on this simple method of calculation has predominated for most of the past two decades.
In April the median weekly rent of $344 equating to an annual rental cost of $17,888 vs the mortgage interest cost on the median house price in April of $385,000 resulting in an interest cost of $14,784.
For most of the past decade, post the GFC the benefits of buying over renting have been in then order of a 20% difference, at one time around 2015 it was a 50% cheaper option to buy than to rent.
In April the median weekly rent of $320 equating to an annual rental cost of $16,640 vs the mortgage interest cost on the median house price in April of $360,000 resulting in an interest cost of $13,824.
There had to be one region of the country that was unequivocally in favour of renting and that is Wellington. Aside from literally one month in March 2016 before property prices started to rise significantly it was 2% cheaper to buy than rent. Today in April 2019 it is 3% cheaper to rent than to buy. This seems to fly in the face of the often reported state of the rental market in the Capital where demand always seem to outpace supply.
In April the median weekly rent of $529 equating to an annual rental cost of $27,508 vs the mortgage interest cost on the median house price in April of $737,500 resulting in an interest cost of $28,320.
As a slight side note the data set used for Wellington covers the wider Wellington region including the Hutt Valley and Kapati Coast and here would be a case of using a tighter geographical data set may well change the outcome for the decision.
At this time the data shows that in Nelson there is no difference between renting or buying. Since 2016 the trend has been moving in favour of renting, however the majority of the past decade has been fairly well balanced between renting and buying.
In April the median weekly rent of $396 equating to an annual rental cost of $20,592 vs the mortgage interest cost on the median house price in April of $540,000 resulting in an interest cost of $20,736.
In contrast to its neighbouring region, Marlborough region clearly from the data shows it is cheaper to buy than to rent and has been the case for the vast majority of this decade. At this time it is 24% cheaper to buy in Marlborough based on median rent and median sale price.
In April the median weekly rent of $390 equating to an annual rental cost of $20,280 vs the mortgage interest cost on the median house price in April of $427,500 resulting in an interest cost of $16,416.
At this point in time based on April data it is 17% cheaper to buy in Canterbury than to rent. The median weekly rent of $396 equating to an annual rental cost of $20,592 vs the mortgage interest cost on the median house price in April of $460,000 resulting in an interest cost of $17,664.
Again as stated in reference to Wellington the Canterbury region is large and diverse and not wholly representative of say the Christchurch city or specific suburbs, this is where the data across a whole region can only provide an insight not the basis for a specific decision as to buying or renting.
Since 2011 the data clearly shows that the cheaper option across the Otago region is to buy rather than rent with the April data showing a 30% benefit.
In April the median weekly rent of $443 equating to an annual rental cost of $23,036 vs the mortgage interest cost on the median house price in April of $463,000 resulting in an interest cost of $17,779.
Outside of a short period running up to the GFC when interest rates rose the data clearly shows that the cheaper option across the Southland region is to buy rather than rent with the April data showing a 28% benefit.
In April the median weekly rent of $283 equating to an annual rental cost of $14,716 vs the mortgage interest cost on the median house price in April of $300,000 resulting in an interest cost of $11,520.
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