thestarside
New member
A few years ago there was a Canadian portfolio manager who put out a video discussing the actual unrecoverable costs of buying, accounting for generally ignored costs such as opportunity cost, maintenance costs and cost of capital. This was entitled "The 5% rule", and assumed that the mortgage interest rates would be around 3%. Basically, the rule of thumb guide meant that if your yearly cost of renting an equivalent property were less than 5% of the value of the home, you would expect to be financially better off renting than buying. If the cost of renting an equivalent home were more than that number, than it is financially better to buy the house if you were living there long term. You can see the video here The 5% rule
Today, interest rates are around 7%. So if we take the same rule, it becomes the 9% rule. If we take the median house price in Auckland, it is around a million dollars. 9% of 1 million dollars/52 weeks in a year = $1730 a week. A $1700 rental in Auckland is typically far, far nicer than an average million dollar house.
Of course there are a few things that could happen. Mortgage rates could drop again. Rental yields could also go up more than inflation. Council rates could drop (unlikely). The rule cannot predict the future. There are also plenty of non-financial reasons to buy a house, which I'm not going to discuss as this is a personal finance subreddit.
Is buying an average Auckland property at current prices a bad financial decision, even as a long term investment?
Today, interest rates are around 7%. So if we take the same rule, it becomes the 9% rule. If we take the median house price in Auckland, it is around a million dollars. 9% of 1 million dollars/52 weeks in a year = $1730 a week. A $1700 rental in Auckland is typically far, far nicer than an average million dollar house.
Of course there are a few things that could happen. Mortgage rates could drop again. Rental yields could also go up more than inflation. Council rates could drop (unlikely). The rule cannot predict the future. There are also plenty of non-financial reasons to buy a house, which I'm not going to discuss as this is a personal finance subreddit.
Is buying an average Auckland property at current prices a bad financial decision, even as a long term investment?