To rent or to buy? Your property investment questions answered

MAS Head of Growth (Investments) Jules Riley offers a fresh perspective on the rent-or-buy debate and discusses the potential benefits of holding onto your investment property long term. 

Is buying a house asap and investing in property the best way to make money?

Buying a home is likely to be the largest financial decision you’ve ever made, so it’s important to make it for the right reasons. Residential property performed well for the 30 years prior to 2022, delivering average annual returns of around 7% with a sevenfold increase in valuations. That said, the future may look different to the past.  

House prices in New Zealand are now about 7 times the average annual income and stretched affordability limits future growth. This is already apparent in Auckland, our most expensive city, where prices have risen only 10% since 2019. That’s a return of around 2% per year, less than what you could earn in the bank for more risk. The Reserve Bank’s recently introduced debt-to-income caps of 6 to 7 times annual income will also help limit the growth of house prices going forward. 

Alongside unaffordability, another handbrake on price growth is interest rates. The massive tailwind caused by interest rates falling from above 20% in 1987 to around 2% in 2020 is unlikely to be repeated. And the combination of an expensive housing market with higher household debt means that even relatively small increases to interest rates can impact mortgage serviceability and price growth. 

On the flipside, renting gives you the time and flexibility to save a bigger deposit and understand what you want to buy. Don’t be pushed into buying prematurely by those that claim rent is wasted money – the stats don’t back this up. The cost of homeownership in New Zealand (if you’re buying a house) is typically twice the cost of renting. Therefore, renting can help you save more and build a bigger deposit. This enables you to borrow less and reduce your interest costs for when you do buy. 

Although future price rises may be more measured, buying a home to live in can still make good financial sense. One way to think of it is as a 20 to 30-year forced savings plan with tax-free capital gains along the way. Perhaps a new reality just calls for a new approach: To buy a house as your home first, and an investment second.  

Is buying a small house and trading up over time a good strategy? 

While the last 3 years have seen average house prices in New Zealand drop, previous decades of rising house prices have conditioned many to think of the property market like it’s a ladder they need to climb. Stand on one rung just long enough for your equity to rise and then jump up to the next rung to get into a flasher suburb with fancier neighbours.  

But the hedonic treadmill theory suggests that we tend to return to a relatively stable level of happiness despite big changes in our circumstances. In other words, a bigger house may not make you happier. By comparison, the benefits of buying a home you can afford and holding on to it are substantial. When you stop competing and looking to climb the ladder, you can fully engage with your neighbours and community. 

One of the most fascinating insights of a study of US millionaires was that they tended to be disproportionately clustered in middle-class and blue-collar neighbourhoods. Living in an average area helped individuals avoid lifestyle creep, freeing up money to save and invest. While occupants of wealthier neighbourhoods tended to earn more, much of this was spent on luxury goods and services, while savings and investment were neglected. 

A buy-and-hold strategy can also help you to manage volatility and avoid transaction costs. Like shares, property is a growth asset, meaning it typically has higher returns but comes with more risk. It’s generally not recommended to invest in growth assets unless you have an investment timeframe of 12 or more years. This longer timeframe helps you manage market volatility to earn higher expected returns over time.  

Residential property is relatively illiquid and transaction costs for buying and selling property can also be high. For the buyer, there’s legal, building inspection and LIM costs; for the seller there’s marketing costs and real estate commissions of 2–4% of the sale price. These have the potential to take a big chunk of your net return over short holding periods. 

There are many factors to consider when it comes to making the best financial move for your future. When it comes to saving for your home, our MAS Advisers can help you get there. We offer different investment solutions that could help.

How to choose a good house?

Here are a 4 key factors to consider when you’re on the hunt for a new home:  

1. Homes in flood zones or earthquake-prone areas not only come with potentially higher premiums but may also have certain coverage exclusions. Local councils around New Zealand have detailed online maps where you can search for a specific property to check whether it’s located in a zone prone to these events. 
2. Properties with poorly maintained roofs are more susceptible to water damage, which is one of the leading causes of insurance claims in New Zealand. Be sure to get a full roof inspection to avoid future leaks. 
3. Problematic materials like Dux Quest piping or outdated electrical wiring can lead to major insurance issues. Address these during the building inspection to avoid high repair costs or future claims.    
4. Be aware of properties that may have restrictive cross leases, body corp rules or covenants, as these can limit your ability to make changes or renovations that you might be keen on in the future. They can also lead to potential disputes with neighbours which can be time consuming, stressful and costly.   

Read our article 5 things every first home buyer should consider to see what else you need to be thinking about when house hunting.