Renting vs Buying in today's flat capital gains market

[matt.tomlinson]

Hi there- I'm a noob to this having come back from 5 years living and working in Australia. We have a deposit of $300k and have pre-approval to buy for $1.2m in Auckland. Lately the news coverage has been of a stagnant and even falling house market in central Auckland so we are now hesitant to buy. Currently renting at $450 a week between the two of us close to work and the city.

If we see no capital gains or a declining market which is what the REINZ data is pointing to with high amount of stock on the market, increased days to sell, drop in median prices, election and possible change of govt etc is it better to rent for the next 2 years and invest the additional savings into shares etc

I ran some numbers through the Westpac investment calculator

- Borrowing $820k at 5.49% results in $45k interest p/a
- This nets out to $865 p/w
- Our current rent is $450 p/w so the opportunity cost of buying a house is almost $22k a year (excl rates, insurance, maintenance etc)
- If capital gains are flat maybe it makes sense to rent and invest that additional $22k into shares, term deposit etc

We own a house in Petone which is cash neutral at the moment and we could potentially use the additional $22k to pay down that debt too or save it to buy another IP in a couple of years time. Just want to check with the experienced investors out there whether my maths is correct and what they would do in this situation?

Cheers Matt

[portofolio]

Better save the money and wait. The price is coming down and will continue to drop till the affordable level or the level where first home buyers are able to borrow and afford.

Other Domestic factors show:

- Immigration reduced targeted annual number
- Chinese money won't come into the country anymore
- Hard to borrow for working class, LVR restrictions
- Post-Election change policy risk
- Land supplies increase in Auckland

Other International Factors show:

- QE ends
- Canada property market in trouble
- Anti gloabalization power rises, bad for international trade

[Bobsyouruncle]

We don't have flat capital gains in Auckland, just a slowing rate of increase. the longer you wait the more money you will pay. Especially if it's to live in just buy it.
Of course if you understand shares and think you can earn at least 100K a year out of them to not get behind real estate then do it. but otherwise I would not wait. In fact I would say right now is the best buying we have had in quite a long time.

You will get a lot of differing views on here but anybody who says Auckland prices are going to fall or stagnate long term is ignoring 100 years of growth and unprecedented demand and inflation. So don't wait.
We are not like Perth or other Aussie towns that were jacked up based on just one industry. Auckland prices are going to keep going.

[Don't believe the Hype]

I think you should continue to look for the right home for you. Markets (and sentiment) change very quickly as we've seen in the last few months.

Right now there is a good level of supply - this means you're more likely to find a suitable property vS. Choosing the best of a small number of bad options.

With fewer buyers in the market you will be able to negotiate and secure a house at a good discount to fair value - it may take some time for vendors to accept the fact that they won't get the price they thought their property was worth in Dec16 - Jan17.

You don't need to rush - be picky and negotiate hard.

While you're right to think about the delta between renting and owning the numbers aren't quite as you suggest.

If you can negotiate a $100k discount on a $1.2M property (based on Dec16Jan17 prices) then the $22k rent saving is covered for 5 years

If (when) the market heats up there is a high probability that the same $1.2M property could jump $50k-$100k so the difference between what you might pay now and what you might pay is a few years could easily. Consume the savings you think you'll achieve by renting.

i personally prefer buying in a slow/flat even declining market than buying in a heated/hot market.

last though - think long term... even if you do buy now with a $100k discount to Dec16-Jan17 prices you'll be thrilled, values may continue to fall and by the end of the year you might think you could have bought the same place for a $200k discount - now you're pissed!! It's your home, in 5-10 years you'll have forgotten that you didn't pick the bottom of the market to the day.

Good luck

[Jeffa]

The best time to buy is now less competition it doesn't matter who gets into government house prices will only increase...

[Anthonyacat]

[absoluteproperty]

Better save the money and wait. The price is coming down and will continue to drop till the affordable level or the level where first home buyers are able to borrow and afford.

Other Domestic factors show:

- Immigration reduced targeted annual number
- Chinese money won't come into the country anymore
- Hard to borrow for working class, LVR restrictions
- Post-Election change policy risk
- Land supplies increase in Auckland

Other International Factors show:

- QE ends
- Canada property market in trouble
- Anti gloabalization power rises, bad for international trade

An excellent post with sound advice, every aspect covered without bias. I commend such an excellent reply.

As an investor looking for a new IP in Wellington, renting while I look for a new home to live in based in Auckland I could not agree more.

[Keys]

We own a house in Petone which is cash neutral at the moment and we could potentially use the additional $22k to pay down that debt

When you go to a sale and buy that bedroom suite for $300 below retail. What do you do with that $300?

When you get the groceries and save $85 on the overall spend because of the mark down prices ........ What do you do with the $85?

What makes you think you can effectively and consistently put the " additional $22k " to good use?

[matt.tomlinson]

When you go to a sale and buy that bedroom suite for $300 below retail. What do you do with that $300?

When you get the groceries and save $85 on the overall spend because of the mark down prices ........ What do you do with the $85?

What makes you think you can effectively and consistently put the " additional $22k " to good use?

I agree it takes discipline to save that money

[matt.tomlinson]

Thanks for everybody's advice. Our plan is to wait another 6-18 months if we do wait and not look to rent for 2 years and over.

I was chatting to a buyers agent today at the gym and talking about the market and he had some interesting thoughts. He reckons Listing agents are playing down the dip in prices as just seasonal and haven't been able to condition sellers to accept the new normal of lower prices and we now have a mexican stand off between buyers who want a bargain and sellers who want what John down the road got in June 2016...

[Don't believe the Hype]

we now have a mexican stand off between buyers who want a bargain and sellers who want what John down the road got in June 2016...

this is a normal phenomenon when there is a change in sentiment...

BTW - do you think the buyers agent might have some vested interest for his comments about the market being softer than the selling agents are suggesting?

[chris_gee]

In effect you are asking will prices fall in the near future. One could argue that interest rates are likely to rise from historical lows thus increasing repayments and lowering affordability and thus demand. On the other hand there is a shortage unlikely to be resolved in the near term. When demand exceed supply prices rise. However lack of affordability reduces demand.
There are some questions you could ask - do you actually need a $1.2M house? What will you need in say x years when perhaps you have a family and one income?
Your rent is now cheap but even a 5% tax free capital gain pretty well covers any difference. You won't get that on a term deposit and buying shares for a year or so is high risk.
Prices may fall somewhat and very likely stagnate for some years then rapidly change and over the long term do well. Auckland is a major city with geographical constraints so will remain relatively expensive.
Probably now is a good time to buy and bargain since unlike many you have a good deposit and finance. Many do not.
I see Little is pointing to his first house almost tripling in 17 years. In fact it works out to 6% compound a yearn which is not that remarkable long term and covers periods of no or little growth and high growth.
In short 10% growth pa is unlikely and unsustainable long term but the timing and extent of any change is difficult to predict.

[Nick G]

$1.2 mil house at 20% deposit @ 5.5% interest = $52,800 per year

$1.1 mil house at 20% deposit @ 6.5% interest = $57,200 per year

Lots of signs pointing to interest rates continuing to rise.

[Beginner1]

"New Zealand housing market overvalued, could go bust", says Goldman Sachs

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11857022

All signs are saying it will bust. Whether it would be 10% or 40% would be the interesting question?? Time will tell. We will still be here talking about the mother of all busts or Not. All we could do it be ready for a gloomy day. I wouldn't invest in the current market at all. Even my kiwisaver is on cash only since mid last year. I would invest when no one else want to invest. When number of pesimistic people like me increases there will be a property bust. it is all about perception.

Since this there is no wrong time to buy your first home. Why don't you consider a cheaper house in Auckland? Higher the property price more drop during a bust?

[portofolio]

From my previous 17 years experience, it is not a good time to buy any share as well. All ITM or overvalued, there are still some opportunities to do the day/short term trading, but involved huge risk.

Try to change my KIWISAVER provider from Milford Assets Active Growth Fund to ANZ cash fund, had a look at the latest fund monthly report. I was surprised that the fund manager from Milford Assets Active Growth Fund already converted about 20% shares into cash/ term deposits. Very impressive, they did not do this during the last 5 years once. I think that lots of professionals well prepare for the future downtrend.

Keep your cash as the king during the future two years.

Buy when the blood is in the street!