Barely a week passes without the state of our housing market being in the news – and lately, for all the wrong reasons. Esther Goh wonders if we’re entering the age of Generation Rent?
However, members of ‘Generation Rent’ need to make sure they’re planning for their twilight years. New Zealand’s relatively low rate of elder poverty is partly due to the older generation’s high rates of freehold home ownership (houses were acquired at a much lower cost back then), and the Productivity Commission points out that anyone entering retirement while renting may face financial hardship. New Zealand Superannuation – assuming it’s still around when you hit retirement age – is set up to work better for people who no longer have a housing payment. Renting for life means renting in retirement, unless you’re planning to buy a house in your dotage. “That need doesn’t go away,” Shamubeel says.
Shamubeel stresses it’s critical for renters to have additional savings for this reason. Whatever you’re saving on housing by renting, you should be disciplined about socking it away. “People quite often mix up housing with saving for retirement and an investment,” he says. Yet these are all things that you need to consider separately and individually. Although property values have been rising for decades, no investment is guaranteed, and paper gains are just that – theoretical – until cashed up.
Europe is often trotted out as a shining example on the side of long-term renting, but that doesn’t automatically translate down under. “In countries like Germany where there is a significant number of rent-for-life people, the state and large companies provide rental properties at a reasonable return, giving security of tenure to tenants. I see no movement like that in New Zealand,” wrote finance expert Mary Holm in a recent New Zealand Herald column. In the UK, which is also facing a similar housing squeeze, the Labour Party is promising help for ‘Generation Rent’ households in the guise of secure long-term tenancies, the abolition of letting fees and a cap on rent rises in the private sector. After all, renters lack long-term stability – a house can be sold over their heads at any time or rent may be raised, forcing them to move. And should you want a pet or to put your own touches on your home, your options as a renter are severely limited. New Zealand renters currently have no equivalent to the association for landlords; the Property Investors Federation.
The standard of housing, particularly of rental property, is also a concern. “The quality of rental housing is generally low and the tendency for short-term tenancies can adversely affect other social outcomes such as health and education,” stated a recent Productivity Commission report. The commission recognises cold and damp are common problems in the rental market; our older housing stock falls below the standards of other OECD countries. The cost of poor housing is paid by renters in human terms through poor health and wellbeing. Meanwhile, housing industry body Beacon Pathway estimates if six fundamental improvements were made to New Zealand homes, the country could save enough energy annually to power 500,000 homes, reduce
$54 million worth of tradeable CO2 emissions, and save 130 million cubic metres of water.
The Home Performance Advisor programme, launched in 2014, is one potential industry fix, as is the rental WOF scheme currently being tossed about by various politicians. But in the meantime renters don’t often get a lot of choice. (Personally, I’ve gotten a lot more familiar with mould in recent years than I’d like; the catalyst for leaving our last rental was finding a mushroom growing through the hall carpet. I’ve heard similar tales from others.)
While renting in New Zealand has its less favourable aspects, buying also has its downsides. We pay some of the highest interest rates in the developed world and can’t lock in mortgage rates for longer than five years (in the US, a fixed mortgage can be fixed for the life of the loan). Could you afford your mortgage if rates rose to 10 percent? And as a homeowner, you also need to be prepared to shoulder responsibility for anything that could happen: burst pipes, broken stove, a new roof. Council rates are another rising cost for homeowners.
On the plus side, at the end of all the mortgage payments, you will eventually own your own property. One line of thinking considers a mortgage as ‘forced savings’. Homeowners are generally building equity over the years, while enjoying more stability and the freedom to make their house their own by painting, renovating or landscaping. Studies have also found strong links between home ownership and better educational and earning prospects for children, among other positive outcomes. Meanwhile as a renter, you may be paying less in rent now, but what are you doing with that extra money? In theory you could (and should) be putting it into investments. In practice, you might well end up putting it towards nights out, foreign holidays or shopping sprees.
Renting is often a short-term solution, but buying is about being in it for the long haul – a home loan will probably be the biggest financial commitment you’ll ever make. Odds are your house will be your largest single asset, for which you’ll pay much more than its current value over the years, thanks to interest.
The quality of rental housing is generally low and the tendency for short-term tenancies can adversely affect other social outcomes such as health and education – Productivity Commission Report
Nevertheless, climbing the property ladder remains the dream for many of us, including Tom Hartmann, resident blogger for www.sorted.org.nz. “It would be nice to own our own place. To not be at the mercy of a landlord’s choices (like green bedrooms), to be masters of our own domain. And to not be in the middle of renovations or repair work,” he says.
If you’re serious about buying a home, you may have to sacrifice a lot along the way to scrape together a deposit. Assuming your financial house is in order and to the bank’s liking, there are a few options to help you get into your first house. If you meet the criteria, a 10 percent down payment could be enough to get you across the line under the government’s Welcome Home loan scheme, even in the age of loan-to-value (LVR) restrictions. And KiwiSaver members have the first home deposit subsidy and withdrawal options to consider. Just don’t forget to also budget for insurance (home, contents, mortgage repayment), rates and other ongoing costs.
Just remember: a house can be both a home and an investment. We shouldn’t rely on it as our only nest egg – but for many it’s a good place to start.
Food, water, shelter. Out of these basics, housing is generally our biggest expense. In New Zealand, we spend on average a quarter of our disposable income on keeping a roof over our heads (and more than a fifth of households that rent pay at least 40 percent toward housing, compared with five percent of owner-occupiers). We’ve also got a strong culture of home ownership – there’s life still in the Kiwi quarter-acre dream.
The thing is, we have a serious housing affordability problem on our hands. There’s a shortage of dwellings and we’re paying too much for the ones we have. Housing in all New Zealand’s major centres has been classified as “severely unaffordable” by the international Demographia survey. Auckland, where prices are eight times the median income, is worst off (an affordable region would have median house prices of three times household income or less). Property isn’t just expensive in relation to earnings; real prices have been rising, more than doubling in some areas over the past decade. As a result, the Salvation Army estimates that access to quality, secure, affordable housing is a real issue for up to a third of Kiwis, and inequality between renters and owners is increasing.
Even buyers with modest aspirations – less Wellington, more West Coast – see home ownership slipping out of their reach. “New Zealand house prices have increased by a staggering amount over the past 30 years, aided by a mixture of policies and social and cultural changes that have forced up the price of building or buying a house,” says a recent report by public policy think-tank The New Zealand Initiative. As the report’s authors Michael Basset and Luke Malpass put it, “Someone in an inner suburb of Auckland who bought a home for, say, $70,000 in 1975, lived in it for 37 years, and did little but basic maintenance on it might find the house worth $1.5 million-plus today. Someone in, say, Torbay on Auckland’s North Shore, who built a ‘standard house’ … in 1969 for $16,000 and did basic maintenance would find the property worth about $1 million today.”
Does it really matter? Renting for life is common in other parts of the world, after all, and there are definitely advantages to being a renter. For one, it frees you from responsibility for repairs and maintenance. You have more flexibility should you decide to move elsewhere or go travelling. And perhaps most importantly, it’s often cheaper than paying a mortgage. The New Zealand Property Investors Federation has calculated that it’s currently $138 per week cheaper to rent than own the average New Zealand home.
Shamubeel Eaqub of the New Zealand Institute for Economic Research is a committed renter himself. Right now, he says the cost of a mortgage versus the equivalent cost of renting just doesn’t stack up financially. He says the notion of rent being “wasted” or “dead” money is only true if rent outweighs a mortgage payment – either way, you still need to put a roof over your head.