New subscribers to the NZ Wealth & Risk mailing list receive a Build Your Own Financial Plan series of emails. This series consists of more than a dozen regular emails detailing certain aspects of your financial life.
Below is an excerpt from one of the lessons. It's about home ownership. If you'd like to receive more emails from this series, complete the form below.
In any case, enjoy the article! Hopefully it gives you some food for thought.
Owning your own home has long been part of the “Kiwi dream”.
Kiwis put a greater emphasis on property ownership and investment than many other places in the world. This is a function of many things, including culture and various regulatory settings.
Property prices in New Zealand are currently higher than most other countries, relative to household incomes and the cost of renting. This has been the case for some time. Whether this is sustainable remains to be seen.
As you may have gathered from my writing elsewhere, I think there are many risks associated with direct property investment that don’t receive enough attention. Many people borrow to invest, which can magnify returns – but can also magnify losses. Even if you don’t borrow, you’re still buying an undiversified asset which is difficult to turn into cash. Turning a property into cash takes time, expense, and involves a lot of uncertainty.
It’s lonely to keep pointing this out, because there are entire industries of people with an incentive for the property train to keep going. Almost everyone with a professional interest in property has an interest in property maintaining its value – and preferably, increasing. This includes real estate agents, finance brokers, lenders, and even Governments – given that most engaged constituents have a large portion of their wealth tied up in property.
But my intention here is not to rail against property investment. My intention is to discuss home ownership within this broader context.
Because I’m not anti-property. Despite what I’ve said above, my wife and I purchased a home in 2017. On top of that, we committed one of the biggest financial crimes out there by over-capitalising and buying more house than we need.
There were various factors behind our decision. We have young children; we’re in a stable professional situation; and we know where we want to live for the next 20 or more years. Effectively, our mortgage repayments and the other costs of ownership are a form of rent, and we are locking that rent in for the foreseeable future.
We may or may not make money when it comes time to sell. We don’t mind. We’ve locked in a “rent” to live in a house that’s perfect for us, and we’re happy to pay it. It’s a financial decision that we’ve made in light of our personal values and priorities.
But as I keep stressing, everybody’s circumstances and objectives are different.
There is nothing wrong with renting. It is not “pouring money down the drain”, as many people say. Paying rent is the same as any other transaction: you’re paying for a service, and you get a service in return: a roof above your head.
Frankly, when you compare the cost of renting with the cost of owning, you could argue that owning is “pouring money down the drain” – especially when you look at the opportunity costs associated with investing the deposit/equity you’ve put into the house. Maybe property prices will increase, which will make up for the money you’ve poured into ownership. But maybe it won’t. There are no guarantees either way.
All of this is a roundabout way of saying that owning your own home is a personal decision, that should be determined by your circumstances, needs, and objectives.
As a rule of thumb, if you’re not planning on living in a place for five years or more, renting is likely to be better for you than owning.
And if you can’t afford to buy a home? Take consolation that you’re not pouring money down the drain, and there’s a good chance that your landlord is actually subsidising your lifestyle. Take solace in the fact that you don’t have all of your financial eggs in one, big, illiquid, geared, basket.
And don’t forget – even if you can’t afford a property at this point in your life, you can still get into a terrific financial position! There are plenty of other ways to accumulate wealth.
Don’t forget that the type of house that might be out of reach for you now is different from the type of house that might be suitable for you in several decades. I’m already looking forward to moving into a smaller (and less expensive) home when my wife and I are empty nesters.
I believe that being in a position to own your home when you reach retirement age is an important goal. In fact, a minimum goal for most people should be the amount necessary to buy a small unit or a pay an occupancy advance for a retirement village by the time they’re in their sixties. Even if you don’t own until you get to this stage, if you have the funds to do this, you’ll be better off than someone who has to rent in their retirement.
The final thing worth mentioning is that home ownership is only one part of the puzzle in terms of ending up in a good long-term financial position.
If I were to categorise personal assets into three categories, I would break them up as follows
- “Stuff”. This includes your clothes, your gadgets, your chattels, and your cars. These are the things that might add to the quality of your life, but don’t add to your financial position.
- “Home”. This is the house you live in. (Or houses, if you have multiple houses and/or a bach.) You can sell your home, but most of the proceeds will go towards buying the next house. It provides you with shelter, and it saves you from having to pay rent, but it doesn’t provide you with an income.
- “Investments”. These are assets that generate an income for you. “Stuff” doesn’t generate an income for you. “Home” doesn’t generate an income. “Investments” are important because they generate income for you, and in the long-run can support your lifestyle when you’re no longer generating an income of your own. Investments can include financial assets (inside and outside of KiwiSaver), as well as other asset classes – including rental properties and interests in businesses you’re involved with.
If you buy a home that’s so expensive that you can’t build your investments, then that may compromise your long-term financial outcomes. Although being able to own a mortgage-free home or get into a retirement village is a minimum goal by the time you retire, I recommend building a decent nest egg over and above owning your own home, because it’s the income from this nest egg that will support your lifestyle.
If you have a mortgage, at the very least consider contributing to KiwiSaver. Or focus on repaying the mortgage as quickly as you possibly can, so you’ve got plenty of time to focus on building income-generating investments before you retire.
If you’re interested in reading more, check out the following articles:
- Can't afford a home in the current property market? You can still get into a good long-term financial position.
- A 30 year mortgage is too long
- The big financial decisions you make need to reflect your values and priorities
- Budgeting – some contrarian thoughts