How to be financially secure without being a homeowner

Mary Holm is on holiday until January 26. While she’s away, we’re publishing edited extracts from her new book Rich Enough? A Laid-Back Guide for Every Kiwi

You don’t have to ever own a home to be financially well set up. This goes against the grain for many New Zealanders. But house prices — at least at present — are out of whack with incomes, and out of reach for many would-be first home buyers.

It won’t always be that way. How do I know? Just by looking at history.

From the 1950s to the late 1980s, the average New Zealand house price was two to three times the average household annual income.

Then house prices gradually rose, to 6.5 times income in 2008. They then dropped, but have since risen to about that level again. In Auckland, meantime, house prices in 2018 were more than nine times annual household income.

That is way out of line. Generally, around the world, houses cost about three times household income — as they did here for 30-odd years just a few decades ago.

People have a tendency to think that whatever has been going on in the share or property markets for a while will continue, but it never does.

House prices, as a multiple of average incomes, will fall again. It’s just that we don’t know when.

In the meantime, rather than complaining, if you feel shut out of the housing market think in terms of getting on with your life as a renter — and possibly staying that way for the rest of your life. You can always change your mind later.

Weighing up the finances

Renting for life doesn’t have to be a bad decision financially.

You can do fine as long as you reach retirement with lots of extra savings — preferably several hundred thousand dollars — to cover the costs of your accommodation for the rest of your life.

That might sound difficult — saving a whole lot more than people who own a home — but it doesn’t have to be.

Generally, it costs considerably more throughout life to own a home than to rent accommodation of a similar standard. Not only do you have to pay mortgage interest, but also rates, house insurance and maintenance.

If you save the difference, and invest it wisely over the years, you might even end up better off than your homeowner friend on about the same income as you.

How do you know how much to save? Ask how much your friend spends on having her or his own home.

I’ve seen various calculations of who becomes better off — the homeowner or renter. The answer always depends on the assumptions you make.

One thing is certain: if you’re a renter you won’t win unless you are:

● Disciplined about saving. It’s not clever to live the high life because your accommodation costs are cheaper. The best way to keep the savings rolling in is to set up an automatic transfer every payday.

● Willing to make higher-risk investments with your savings, so they get higher returns on average. A good choice would be a KiwiSaver or non-KiwiSaver growth or aggressive fund, which holds mostly shares.

Your balance will sometimes fall, but you need to stick with it through thick and thin.

One clear financial advantage for the renter over the homeowner is that your savings can be more diversified.

If you’re in a growth fund, you will be in a wide range of shares and probably also some bonds and other assets.

Pluses and minuses

An obvious negative of renting is that your landlord can kick you out.

That would be especially bad if you have children — although longer-term leases could help reduce that risk.

Also, in most cases you don’t get to choose the carpets, paint colours, curtains and so on — although, again, you might with a longer lease.

There may be similar issues with the garden.

If you’re a keen gardener, you’ll want some kind of guarantee that you won’t be asked to move out just when the vegies are coming into their own, or the hedge is getting bushier.

And if you enjoy DIY or renovation projects, you can’t build up value in the property by adding a deck.

Also, over the longer term, you won’t have a property for your children to inherit.

And there’s less security for your retirement in a rented property, although you could perhaps use your savings to buy a small home at that stage.

But there are some big advantages to renting:

● You don’t have to worry about maintenance and other responsibilities that can sometimes weigh heavily, both financially and psychologically,

If you save the difference, and invest it wisely over the years, you might even end up better off than your homeowner friend on about the same income as you.

on a homeowner.

As I once heard someone say, “Did you have a good weekend, or do you own your own home?”

● It’s often easier for a renter to live close to downtown, which can be a big plus in these times of terrible rush hour traffic.

● You can move house much more easily and cheaply than a homeowner.

For some people, none of this is as important as the pride of home ownership and the fact that you have more control over your living environment.

But for others, the freedom that comes with renting is a big attraction.