Homes not the only way to save

Q. Your column last week made a good case for renting and investing elsewhere rather than home ownership.

However, you did not mention the main factor that, in my opinion, makes home ownership the best bet for most of us. And that is human nature.

Few people are entirely rational about money. We mostly tend to spend up to the level of our income and not many of us are good savers.

In fact, if it were not for the enforced saving required to pay off a mortgage I suggest that most of us would reach retirement age with few assets to show for a lifetime's work.

The examples you use also do not seem to me to be real. Do you really believe that someone with $300,000 in the bank will be content to rent a $300,000 house?

And in your second example, not many people I know would put that $30,000 deposit into a long-term investment when they decided to rent instead of buying a house. It would have been soon spent on a new car or a holiday.

A. You're not the only one to make this point and it's a good one.

Before I go further - and especially for those who didn't read last week's column - my message wasn't that renting is always better than home ownership, only that it sometimes is.

As you say, I didn't go into the fact that many people like home ownership because it "forces" them to save.

I do think, though, that you're selling people short if you assume that's the only way most people could save.

Let's divide people into a large group who are security-minded and a smaller group who live for today. Most of the security-minded own their homes and most of the live-for-today types rent.

Now imagine that the government has seized all property and home ownership is impossible.

I very much doubt if most of us would retire with few assets. The security-minded would save elsewhere.

It's only because New Zealand is so property-oriented that almost all security-minded people save via home ownership.

These days, though, I get the feeling from readers' letters and comments at seminars that there's an emerging new sub-group of the security-minded. They are renters who save the difference between what it would cost to own and what they pay in rent.

By setting up regular transfers out of their income into, say, a share fund, they accumulate wealth without exercising much more willpower than those paying off mortgages.

They are not tempted to buy a new car or a holiday because they prefer the good vibes that come from building up a savings fund.

So yes, they could well end up with $300,000 in investments while renting a $300,000 house, or investing rather than spending $30,000.

It's a perfectly legitimate approach to lifetime financial planning.

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Q. Mary, can I please submit a couple of observations on your column last week.

In scenario A with a mortgage, which is most common, you talk about $22,500 for five years of rates. Rates on a $300,000 house are about $1500, and even if I add house and minimum contents insurance to cover carpets, light fittings and curtains of $500 plus repairs of $500, that is only $2500 a year, or $12,500 over five years.

As you are talking a lifetime decision of ownership versus renting - as once you decide to rent, it will be nigh impossible to buy at higher prices after five or 10 years - the calculations should be done over 20 years. After 20 years, the fixed mortgage repayments become a small part of your income.

When I bought my first home, working as a part-time cleaner to pay the mortgage, I talked to a fellow cleaner whose weekly mortgage was 10 per cent of mine. I was jealous.

Apart from decreasing house payments versus rent, you have security from home ownership. Your landlord is not likely to sell the house after a year, giving you an upheaval with moving costs of say $1500 plus new schools for the children.

Over 20 years, home ownership wins, surely?

A. Not necessarily.

On your first point, at the beginning of the column I assumed rates, maintenance and insurance total $4500 a year. Later, I just called that "rates" for short but, throughout, I was including maintenance and insurance.

Maybe $4500 was too high but others agreed it was about right. The occasional big maintenance job pushes up the yearly average a lot.

In any case, even if you reduce that figure it doesn't change the conclusions.

Nor is it impossible to buy after five or 10 years of renting. People do it all the time, often while they save for a house.

I accept your argument about mortgage payments dropping relative to income over the years. But it's not as strong as your cleaner example suggests because:

* That must have been back in the days when inflation was in the mid-teens. These days the real (inflation-adjusted) value of mortgages drops much more slowly.

* Few people stay in the same house for 20 years. Many have three or four homes in that time, usually trading up and taking on larger mortgages.

* The value of investments made by a renter who invests elsewhere is also likely to rise with inflation.

While a 20-year comparison probably favours home ownership more than a five-year comparison, ownership still doesn't always win.

In Germany, real house prices fell 21 per cent from 1982 to 2002, according to the Economist.

Your last point about security is one I made briefly last week. It is absolutely valid and may be the main reason most people like to own their homes.

Note, though, that the moving costs from one rental to another are minuscule compared with real estate commissions and so on when you sell and buy houses.

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Q. As the property economics professor who set the essay question on home ownership that you answered last week, I was busy marking 105 essays over the weekend and didn't get to read your column. However, some students brought your response to my attention.

Unfortunately, you weren't given all the details. The students were given six research articles that reviewed the experience of housing markets in New Zealand, Britain and Australia.

Various booms and slumps (in real and nominal prices) were analysed at national, regional and intra-urban scales, and data were given on long-term real rates of return.

So, as for grading your column, since you did not have access to the required readings, your answer did not address my question in full.

However, your article did cover the key issues that I was trying to get my students to consider. So, well done and top marks.

Interestingly, one scenario you decided not to cover was a fall in house prices.

House prices in Britain (especially London) declined in nominal terms (cash values) between 1990 and 1994.

This resulted in two million households with negative equity (mortgage bigger than house value). Combined with a recession, it resulted in more than 350,000 mortgage repossessions (from 1990 to 1995), almost a threefold increase over the previous decade.

PS. 1. I am a homeowner. 2. I haven't had time to check the figures that you gave in your article as I am still marking essays.

A. Thanks for the good grade. I decided not to include a scenario of falling house prices as that seems unlikely over five years. And I already - quite unjustifiably, I think - have a reputation for being anti-property.

But when you look around the world, I may have been too optimistic.

I've already mentioned Germany and you Britain. Sweden and Canada have also had big house price falls. And in Japan, in 2002, real house prices were less than half their 1990 peak, says the Economist. Ouch.

I'm not saying the same will happen here soon. But it can't be ruled out.

PS. 1. I'm a homeowner, too. 2. I hope you're done with the marking by now.