Tenancy a cheaper bet

Patrick Walsh owns eight rental homes but wants to build up his assets before settling down. Photo / Janna Dixon

Would-be first-home buyers have missed the boat to move from renting to owning.

The latest BNZ rent-or-buy report, which shows prospective first-home buyers whether they should continue to rent and save for a deposit, or when the time is right to buy, indicates renting is now a better move financially.

This year, the affordability gap closed, but now it is becoming more expensive to buy than to rent.

In September, it took 27.3 per cent of a couple's take-home pay to service the mortgage and related household costs on a lower quartile priced house. This is down from 32.2 per cent at the same time last year.

To pay the median rent on the same type of house takes 22.5 per cent of household income, down from 23.9 per cent at the same time last year.

It costs 4.8 per cent more household income to afford a traditional 25-year table mortgage at the current interest rate on a two-year fixed contract than to rent - assuming buyers had saved the deposit to afford a mortgage.

It takes a household 3.4 years with a saving rate of 20 per cent to save a 20 per cent deposit.

For many, affordability issues can be a barrier to owning their own home, and renting is often seen as a second-best option. But it becomes more attractive in times such as these when incomes are flat and unemployment is rising. And these factors put downward pressure on rents, which are more closely linked to income than house prices.

Already, rents have been flat nationally since mid-2007, while mortgage rates are rising. ANZ economist Khoon Goh says flat to falling rents indicate there is no overall housing shortage - it is only a listings shortage driving up house prices in some areas.

"That means rents will continue to stay low. It's an option that should be looked at closely, as opposed to going out and buying."

Another factor depressing rents is that more people are sharing accommodation. For example, young people under pressure are moving out of flats and back home with their parents. "Household consolidation is freeing up more rental property," Goh says.

Vice president of the New Zealand Property Investors Federation Andrew King says investor associations are seeing a growing number of people in the first-home buyer age band who have bought rental property while living in a rented residence in their preferred suburb.

"They want to live in or near the city but can't afford to own a place there. So they tend to buy in areas further out from town where rental yields are higher, getting on to the property ladder by making their first home an investment property."

But mortgage broker Kim Lyons is sceptical about renting and saving "because it never happens".

He says it is a good time to buy because banks have loosened deposit requirements again. "Banks are taking 5 and 10 per cent deposits providing they are genuine savings, not gifted or borrowed."

Accountant Mark Withers says the amount you save on interest when you invest in reducing your home loan is greater than the rate you could get on any other investment.

"In terms of capital gain, the person who bought a quality family home might ultimately be ahead of the one who bought two or three cheap boxes in a less-desirable suburb."

Get the most out of a property

With downward pressure on rents, investors should look for ways to improve their return.

Vice president of the New Zealand Property Investors Federation Andrew King says charging rent is the prime source of income for rental property, so ensuring you are charging market rent maximises your return. Getting the right rent also helps protect investors against interest rate increases.

King suggests asking tenants if there are improvements they would like, such as a heat pump, insulation, whiteware or a carport. "Find out what they would be willing to pay for any improvements and see if you can help and make a return on your outlay."

An often overlooked method of getting a good rent is to keep up-to-date with current market rents. When using rent statistics, King says investors should take care to correctly estimate the price band of their property. Statistics show the lower, median and higher rents to give an overview of market prices. But he says many investors tend to underestimate the quality of their rental property.

"If they have an average property compared to others in an area, many investors charge an average rent. But an average property actually equates to a superior rental property. This means an average property can achieve the higher rent in the statistics."

Renting his way towards security

Patrick Walsh rents his home overlooking Westhaven in Auckland's pricey St Mary's Bay. In the past three years he has bought investment properties: two in Grey Lynn and six in Otahuhu.

"Owning my own home has never been a priority. I've always thought it is better to build my asset base first, and worry about the toys in life - such as a nice house - after I've sorted out something that can look after me in retirement, which hopefully comes sooner rather than later."

Walsh doesn't plan to buy his own home until he can afford one of the same calibre and in the same location as he can live in as a renter. He thinks he will achieve his financial goals more quickly by renting and owning investment property than by buying a first home.