Wedge between the cost of buying vs renting widening
It’s now cheaper to rent a house than to buy one, according to the numbers crunched by BNZ.
In a BNZ publication, titled Eco-Pulse: Interest rates widening housing cost relativities, chief economist Mike Jones (pictured above) said buying a new house currently costs around 50% of average household incomes and was nearly double the cost of renting, which averaged 24% of household income – or 18% once interest earnings are added back in.
The BNZ analysis was released after the latest Stats NZ data showed annual rental price inflation for new tenancies rose to 6.2% in August, from 4.1% in July, while house prices rose for the fourth consecutive month since the market turned in April, bringing the cumulative rise in the REINZ House Price Index over that period to 2.4%.
“Over the past five years, higher buy costs have been driven in roughly equal parts by big increases in mortgage rates, which are cyclical, and higher house prices, which are less so. Rents have risen rapidly too, but not by as much as debt-servicing costs,” Jones said.
The divergence is observable in all regions, but particularly so in Auckland, where 63% of income is required to serve a new home, compared to 20% of income to rent (or 16% when savings income is added in). Average servicing costs continue to lowest in Canterbury, reflecting lower house prices.
“Overall, it’s clear that high interest rates have widened the wedge between the costs of renting vs. buying,” Jones said.
He clarified that the results don’t necessarily mean that renting will turn out to be the most cost-effective option over the long term.
“First, inflation tends to deflate the value of borrowers’ debt over time, while rent payments tend to rise with inflation,” Jones said. “But more importantly, what happens to house prices ends up being the key swing factor. And no one knows what’s going to happen there.”
Furthermore, BNZ’s number crunching was deliberately focused on the financials and risked missing all the big non-financial and circumstantial considerations involved in a buy/rent decision.
“It’s hard to put values in the spreadsheet for things like security of tenure and being able to hang your pictures up or renovate,” When it comes down to it, these may well end up being the most important in the decision,” Jones said.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.