Long-term renting carries risks
In 1986, when David Lange was prime minister, just under 83 per cent of over-65s owned the roof over their heads.
That had fallen to about 80 per cent 20 years later, a small drop - but worrying since being an older renter is linked with hardship.
The real change, though, was among under-50s, who have trickled out the drainpipe of the housing market in every age bracket at every Census since Lange's Beehive-ruling days. In 15 or 20 years that group will start retiring.
You could call it the rise of the eternal renter.
Which sounds free and empowering, until you consider that New Zealand is not always an easy place to rent and be old.
“We just know our retirement income framework is predicated on people owning a house,” says Retirement Commissioner Diana Crossan.
“Owning a freehold home has been a part of how we see ourselves, so we haven't got the other instruments to help us out.”
Think for a moment about renting at 80.
Europeans can keep a rental home in the family for generations, but Kiwis are usually on a few months' notice of eviction.
NZ Super has been effective at preventing old-age poverty, but it works much better if someone isn't paying rent.
A couple receiving NZ Super is paid $536 a week net of tax. The median rent is $350 to $440 in Wellington and Auckland, according to a recent Massey University report.
“The other option is to move in with your children,” says Crossan. The retirement income system is not going to change in a hurry.
“We can have a look at it in a review but we're talking about the long term before [any changes] kick in.
"It would be a totally different way of thinking.”
Judith Davey, a research associate at the Institute for Government and Policy Studies at Victoria University, has pointed out the lack of affordable housing options for pensioners renting.
“The basic problem for an ageing population in New Zealand is that we don't have that kind of intermediate housing in anything like the numbers we are going to need it,” she says.
“We have either got rest homes, retirement villages or mainstream housing."
Retirement villages require a hefty nest egg if you don't own a home to sell, Davey says. "And home ownership is going down."
Meanwhile, people who say they will save up and rent often do not realise how much they will need, says Crossan.
Little wonder that renters aged 65 and over were nine times more likely to be living in hardship than mortgage-free home owners, according to last month's latest household income and poverty report by the Social Development Ministry.
At the same time the proportion of superannuitants claiming accommodation supplements - a taxpayer boost for people with high housing costs relative to their income and savings - is rising, suggesting that all is not rosy for today's pensioner-renters.
About now you might be wondering why savvy people on decent incomes sometimes choose to be eternal renters.
This is the good news. Renting is probably cheaper over a lifetime for many people at many times, thanks to our over-priced housing market.
New Zealand's unofficial poster boy for this pro-renting view is economist Shamubeel Eaqub, who often tells journalists that he will never buy a house (although he reserves himself an out if needed to maintain domestic harmony).
Personal finance author Martin Hawes says Eaqub's stance makes sense - if you ignore some common foibles of human nature.
“If you weigh up renting and owning there wouldn't be an awful lot in it, but that doesn't take into account what people do with the money,” says Hawes.
“The problems come when those who are renting don't snaffle the difference and put it in some kind of saving.”
And therein lies the crux.
Economists talk about hyberbolic discounting, a fancy way of measuring a trait that most people will recognise: the tendency to make choices our future self may not approve of because we prefer spending a dollar today to spending one tomorrow.
The sheer unlikelihood of saving enough for future rent and some creature comforts in retirement without a big stick at our backs gives the enforced discipline of a mortgage the advantage, says Hawes.
This is true even though people tend to discount the cost of owning, he says - casually forgetting all of the emotional purchases like plants for the garden or a rejuvenating facelift for the bathroom.
The other big advantage of buying is security against rising costs, he says.
Trying to pin down what you would need to cover future rent requires tackling "assumptions like property growth rates, rent growth rates, mortgage interest rates”, says Hawes.
“If any one of them is even a little bit wrong it can throw the whole lot out.”
When you own, he says, “one of the biggest costs we have over our lives is covered".
“I would say to a 30-year-old that if you possibly can, you should own your own house because you hedge or mitigate the risk of any major increase in house prices or rent as well as the benefits of enforced savings.”
Which might explain why Crossan sighs when you mention the fashion for rent-happy views.
“It worries me when people say that, because people who say they are going to rent are often quite savvy, and they have thought it through and know that they can do better in the short term,” she says.
In other words, there are steely-willed money squirrels like Eaqub, who are very likely to make renting work for them long-term, and who will adapt if the economic indicators change.
Then there are the rest of us financially ill-disciplined souls, who should probably aim to be mortgage-free by 65 or sooner. Ideally we will also have some extra savings for added comforts.
Whether we trust ourselves to pay it off early and save the difference, or drag out the mortgage to 65 (incurring more interest) and save alongside it, depends on personality, says Crossan. "It is about knowing yourself."
If you have to ask, you probably need the shackles of a mortgage.
- © Fairfax NZ News
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