Hey everyone,
I am a 30 yo male living with my partner in Auckland. Our combined household income is $150k p.a.
I am currently renting a 3 bed. house for ~$600 p.w. ($2400 per month) - I do not own a home in NZ. I have a deposit of approx. $350k saved up so far - enough to afford the median priced home in Auckland or the greater Waikato region. However, I've deployed all of that money into my personal portfolio of growth funds, ETFs, index funds, international equity and a small portion in bonds (90% Stocks, 10% Bond).
I am open-minded but I've always been 'pro' Stocks and belonged to the Stock Market Investment camp when it comes to the classic 'Real Estate vs Stock Market' Investment debates. Unlike the latter, I've had trouble viewing homes as productive assets unless the macro-economy and variables that are involved prove otherwise. Due to this personal bias, I've never really felt a strong desire to own a home here. Having said that, I realize the downfalls and dangers that come with this way of thinking i.e., 'not owning a home'.
Lately, I've been running the numbers to try and understand if it makes sense to buy a home. Below is my calculation.
--------------------
Investment Period - 10 Years
Rent per month = $2,400, Anticipated Annual Rent Increase = 6%
Property Price = $800,000. My Intended Staying period at the Property = 10 years.
Deposit = $350,000 (or) 43.75%
Mortgage rate = 7.25%, Mortgage Length = 10 Years
Principal - $450,000, Interest Paid over the 10Y period - $183,966
Total Cost of Loan (P + I) = ($5,283 x 12) x 10 = $633,966.
Buying and Selling cost at 1% ea. = ($8,000 + $8,000) = $16,000
Maintenance / Insurance and Service charges at 0.5% ea. over 10Y = ($4000 + $4000) * 10 = $80,000
Stamp Duty - NA (Not sure about this cost)
Total Cost of Owning Property at the end of 10Y = Deposit + Mortgage + Expenses = $350,000 + $633,966 + $80,000 + $16,000 = $1,079,966
-----
Property Growth Assumption = 6% p.a.
Stock Investment Growth Assumption = 8% p.a.
-----
Additional Monthly Investment (Leftover Cash) Towards High Growth Stock Portfolio over 10Y period.
Whilst Buying = $250 p.m. x 12 at 8% compounded annually = $45,737
Whilst Renting = $3,000 p.m. x 12 at 8% compounded annually = $548,838
-----
Buying Scenario:
Property Growth after 10Y compounded at 6% p.a. = ($800,000 x 6%) over 10Y = $1,432,678
Investment Portfolio Growth from Monthly Investments after 10Y whilst Buying = $45,737
Total Cost of Owning Property at the end of 10Y = $1,079,966
Net gain after 10Y = Capital from Sale + Monthly Investment Portfolio - Expenses = $1,432,678 + $45,737 - $1,079,966 = $398,449
Net Gains Realised after 10Y while Buying = $398,449
-----
Renting Scenario:
Investment Growth of Initial Capital $350k at 8% compounded annually at end of 10Y= $426,874
Investment Portfolio Growth from Monthly Investments after 10Y whilst Renting = $548,838
Renting Cost over 10Y period at 6% YoY increase = $379,607
Net gain after 10Y = Initial Investment Growth + Monthly Investment Portfolio - Expenses = $426,874 + $548,838 - $379,607 = $596,105
Net Gains Realised after 10Y while Renting = $596,105
-----
Conclusion: That's a net gain difference of $197,656 from renting compared to buying over the 10 year period.
--------------------
Further Analysis:
There are a number of reasons to assume the housing market has peaked.
In my opinion, the 6% growth assumption for housing in the above estimate is generously geared toward the buying scenario, yet renting came out to be the better option at the end of 10Y period. 30 Year loan period makes the buying scenario even worse. This is due to the opportunity cost of money (down payment) combined with the high interest rates on top of an already soaring inflationary environment working against buying a home. This makes cash and cost of capital important.
Many successful Real Estate investments are built on the principles financial leverage. OECD Countries have set interest rates far too low for far too long that many of us almost forgot what the normal healthy interest rates are. Since we are still facing the aftermath of GFC and Covid to this day, there is a high likelihood that the current interest rates may be the new normal.
The average house price in AKL region currently is $1.4 million, this would take a person earning $100k p.a. saving 100% of his income 14 years to buy it. If we only saved 50% of the income, then the time taken to own outright (without loan) is almost doubled. We've already shifted median multiple, i.e., affordability ratio of home ownership from 'house price to individual income' to 'house price to household income' ratio. This is unsustainable on many levels.
I believe we are entering a new era in the economic cycle where the sensible way forward and priority for the economy should be the focus in 'increase in wage growth' rather than 'growth in house prices'. The wage growth will bring the median multiples back in balance. This is more challenging to achieve in a low interest rate than a high interest rate environment, which is another reason why I believe the interest rates are here to stay.
Finally, my assumptions for the future could be completely wrong. The future could surprise us and totally go in the opposite direction i.e., house prices could keep climbing without real wage growth to back it up, especially when the majority of us are obsessed with only affording the down payment instead of affording a home. This scenario is frightening due to many possibilities.
I understand that no amount of substantiation or numbers can justify when the emotional factors of buying a home are put into the equation. This is purely intended as an analytical approach.
Keen to get others' thoughts and perspective on this.
I am a 30 yo male living with my partner in Auckland. Our combined household income is $150k p.a.
I am currently renting a 3 bed. house for ~$600 p.w. ($2400 per month) - I do not own a home in NZ. I have a deposit of approx. $350k saved up so far - enough to afford the median priced home in Auckland or the greater Waikato region. However, I've deployed all of that money into my personal portfolio of growth funds, ETFs, index funds, international equity and a small portion in bonds (90% Stocks, 10% Bond).
I am open-minded but I've always been 'pro' Stocks and belonged to the Stock Market Investment camp when it comes to the classic 'Real Estate vs Stock Market' Investment debates. Unlike the latter, I've had trouble viewing homes as productive assets unless the macro-economy and variables that are involved prove otherwise. Due to this personal bias, I've never really felt a strong desire to own a home here. Having said that, I realize the downfalls and dangers that come with this way of thinking i.e., 'not owning a home'.
Lately, I've been running the numbers to try and understand if it makes sense to buy a home. Below is my calculation.
--------------------
Investment Period - 10 Years
Rent per month = $2,400, Anticipated Annual Rent Increase = 6%
Property Price = $800,000. My Intended Staying period at the Property = 10 years.
Deposit = $350,000 (or) 43.75%
Mortgage rate = 7.25%, Mortgage Length = 10 Years
Principal - $450,000, Interest Paid over the 10Y period - $183,966
Total Cost of Loan (P + I) = ($5,283 x 12) x 10 = $633,966.
Buying and Selling cost at 1% ea. = ($8,000 + $8,000) = $16,000
Maintenance / Insurance and Service charges at 0.5% ea. over 10Y = ($4000 + $4000) * 10 = $80,000
Stamp Duty - NA (Not sure about this cost)
Total Cost of Owning Property at the end of 10Y = Deposit + Mortgage + Expenses = $350,000 + $633,966 + $80,000 + $16,000 = $1,079,966
-----
Property Growth Assumption = 6% p.a.
Stock Investment Growth Assumption = 8% p.a.
-----
Additional Monthly Investment (Leftover Cash) Towards High Growth Stock Portfolio over 10Y period.
Whilst Buying = $250 p.m. x 12 at 8% compounded annually = $45,737
Whilst Renting = $3,000 p.m. x 12 at 8% compounded annually = $548,838
-----
Buying Scenario:
Property Growth after 10Y compounded at 6% p.a. = ($800,000 x 6%) over 10Y = $1,432,678
Investment Portfolio Growth from Monthly Investments after 10Y whilst Buying = $45,737
Total Cost of Owning Property at the end of 10Y = $1,079,966
Net gain after 10Y = Capital from Sale + Monthly Investment Portfolio - Expenses = $1,432,678 + $45,737 - $1,079,966 = $398,449
Net Gains Realised after 10Y while Buying = $398,449
-----
Renting Scenario:
Investment Growth of Initial Capital $350k at 8% compounded annually at end of 10Y= $426,874
Investment Portfolio Growth from Monthly Investments after 10Y whilst Renting = $548,838
Renting Cost over 10Y period at 6% YoY increase = $379,607
Net gain after 10Y = Initial Investment Growth + Monthly Investment Portfolio - Expenses = $426,874 + $548,838 - $379,607 = $596,105
Net Gains Realised after 10Y while Renting = $596,105
-----
Conclusion: That's a net gain difference of $197,656 from renting compared to buying over the 10 year period.
--------------------
Further Analysis:
There are a number of reasons to assume the housing market has peaked.
In my opinion, the 6% growth assumption for housing in the above estimate is generously geared toward the buying scenario, yet renting came out to be the better option at the end of 10Y period. 30 Year loan period makes the buying scenario even worse. This is due to the opportunity cost of money (down payment) combined with the high interest rates on top of an already soaring inflationary environment working against buying a home. This makes cash and cost of capital important.
Many successful Real Estate investments are built on the principles financial leverage. OECD Countries have set interest rates far too low for far too long that many of us almost forgot what the normal healthy interest rates are. Since we are still facing the aftermath of GFC and Covid to this day, there is a high likelihood that the current interest rates may be the new normal.
The average house price in AKL region currently is $1.4 million, this would take a person earning $100k p.a. saving 100% of his income 14 years to buy it. If we only saved 50% of the income, then the time taken to own outright (without loan) is almost doubled. We've already shifted median multiple, i.e., affordability ratio of home ownership from 'house price to individual income' to 'house price to household income' ratio. This is unsustainable on many levels.
I believe we are entering a new era in the economic cycle where the sensible way forward and priority for the economy should be the focus in 'increase in wage growth' rather than 'growth in house prices'. The wage growth will bring the median multiples back in balance. This is more challenging to achieve in a low interest rate than a high interest rate environment, which is another reason why I believe the interest rates are here to stay.
Finally, my assumptions for the future could be completely wrong. The future could surprise us and totally go in the opposite direction i.e., house prices could keep climbing without real wage growth to back it up, especially when the majority of us are obsessed with only affording the down payment instead of affording a home. This scenario is frightening due to many possibilities.
I understand that no amount of substantiation or numbers can justify when the emotional factors of buying a home are put into the equation. This is purely intended as an analytical approach.
Keen to get others' thoughts and perspective on this.