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Rent or Buy?
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rent-or-buy.jpgProperty prices have fallen significantly over the last two years making houses much more affordable than they have been for some time. Despite this, buyers are still in short supply.

The most logical reason for this is that buyers expect prices to either continue dropping or to at least stay flat for some time. This creates a dilemma for first home buyers and people moving towns; is it better to rent or buy in the short term?

Whether you are buying a property to live in or to rent to someone else, there are two factors to consider.

The first is the extra income you will have if you buy, either because you are no longer paying rent or because you are renting to someone else.

The second is the capital gain you can expect from owning the property. Property prices are not expected to increase significantly over the next 3-5 years. At the same time, rents are still low in comparison with property prices. If you can rent a property for an annual rent of 5% of its market value, why would you borrow money to buy when the interest rate is around 7% and there is little prospect of capital gain?

In the short term, with no expectation of property prices increasing, renting makes sense unless you can buy a property well below market value. For first home buyers, this allows more time to save a bigger house deposit and for others who have sold, it is an opportunity to temporarily live more cheaply in the kind of house that might previously have been out of reach to buy.

In the long term, it makes sense to buy a property for security and peace of mind and to ensure you don’t get left behind when prices inevitably rise again.

Article by Liz Koh

Liz Koh is a financial adviser. Her disclosure statement can be obtained free of charge by calling 0800 273 847.  Author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press, March, 2008.  For free eBooks, go to http://www.moneymax.co.nz and http://www.moneymaxcoach.com/.
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  Comments (1)
Written by hjcron, on 29-09-2010 18:11
The risk with this sort of advice is two fold. First, we in N Z are notoriously poor at serious savings. So if we rent because the cost of renting is slightly cheaper than paying off a mortgage, how many will actually bank the perceived savings? How many will simply find after a year, that money has slipped away? 
 
Secondly, I do not hold as pessimistic a view as Liz about how long it will be before properry prices are back on the increase again. I would be interested to know the basis on which she offers a 3 to 5 year time frame? 
Based on my work in Real Estate, I see a wide range of stats and financial information. Basic market forces dictates that if there is more demand than supply, prices will rise. 
We have a net surplus of people from immigration. We have far less new houses being constructed. Rental prices are rising in Auckland because there is a shortage of houses to rent. 
Banks lending has dropped as less people have been buying, you think they are happy about that situation?  
 
All those factors indicate to me that we will see a lift in house buying in a lot less that 3-5 years! Those who chose to sit on the sidelines would be well advised to keep a very very close eye on the market, or they can find that suddenly your entry level 3 bed home has moved from $400,000 to $425000 or more. It tkes one hell of a lot of saving to make up that step!

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