Renters 'could end up $700,000 better off' than first-home buyers, economist calculates

An Auckland first-home buyer who decided to rent instead could end up more than $700,000 better off in 30 years' time, one economist says.

First-home buyers have been taking advantage of flat house prices and strong investment markets, which have allowed many to accumulate significant amounts in KiwiSaver to use as a deposit.

Simplicity chief economist Shamubeel Eaqub has produced example scenarios for RNZ that indicate that the answer is "it depends".

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His calculation showed the likely outcome of someone buying a house for $900,000 now, which is a typical Auckland first-home buyer amount.

The scenario assumed a 10 percent deposit, annual house price growth of 3 percent, which Cotality chief property economist Kelvin Davidson said was reasonable, and a mortgage rate of 5 percent, with the loan paid off over 30 years.

It includes house insurance costs of $2500 in the first year, increasing at a rate of 7.3 percent a year, council rates of 0.4 percent of the house value in the first year, increasing at a rate of 5.6 percent a year, and maintenance costs of 1 percent of the house value, increasing at 2.7 percent a year.

Rates and insurance have been increasing at a faster rate than that in recent times.

The calculation also includes buying and selling costs.

He compared this to a renter starting with weekly rent of $619 and rent growth of 3.2 percent a year, who could invest the difference between rent and their mortgage payments in a managed fund with a net after-tax return of 5.4 percent a year.

It also includes inflation at 2.5 percent a year.

He calculated that after 30 years, the homeowner would have wealth of $2.1 million and the renter would have investment funds of $2.83 million, leaving the renter $724,530 better off.

But at that point, the homeowner would have a freehold house, while the tenant would need to use some of their wealth to continue to fund their rent through retirement.

Eaqub said it highlighted that there were many aspects that people could think about when they were weighing up a house-buying decision.

Whereas in the past, people expected capital gains to make it worth spending money on rates and insurance, that was not always going to be the case in future, he said.

"There are some pretty big costs of ownership that are coming down with the pipe. It doesn't mean one thing or the other, it's just, I think, that you should do this with your eyes wide open.

"Just being really clear about the cost of ownership and the cost of renting. They're both real it's about the tradeoff… People's circumstances are different.

"For the average homeowner now, rates insurance and maintenance are probably running at $10,000 a year. That's a lot. If you're a fixed income person, a retiree, have you budgeted for $10,000 a year for those things?"

Many buyers are making their choice based on more than the financial calculation.

Eaqub said home ownership would give people connection to community and stability, which were harder to access when renting.

"Security of tenure is a legitimate concern for people both young and old, nobody likes to move house because somebody else wants you to move."

He said people also tended to rent houses that were more expensive than those they might buy. "You have to do an apples with apples comparison."

Davidson said it was reasonable to assume that the growth in house prices over the coming years would not be as strong as it had been over the past decades. He said it was also true that buying a house would not be right for everyone.

"Renting has never been dead money or a waste of time or a huge problem in your life. Renting is a perfectly legitimate way of living and a choice a lot of people around the world make so I don't think it's ever been a slam dunk.

"Even putting aside all the ins and outs of running these numbers, I think it's becoming a more common view that house price growth will be lower in the next 10 or 20 years all else being equal. That will reduce the appeal of being a homeowner. It might not necessarily tip things fully in favour of renting but it shifts the balance a bit.

"We might look over the next 30 years and go well clearly it was a time to not worry so much about owning a house. We're only going to know if things have truly changed in hindsight but it does feel like we're at a bit of a junction now where people are starting to question the long run assumption of capital growth."

He said owners would have the benefit of forced savings. Renters were relying on being disciplined enough to save the difference to build up their wealth to the same extent.

Ed McKnight, of Opes Partners, said the outcome was heavily reliant on the assumptions used, and house prices could rise faster than 3 percent.

"The whole benefit of buying your own home is that eventually payments stop after year 30."