Why renting beats home ownership

Last updated 10:30 16/05/2014
FOLLOW YOUR DREAMS: Renting provides a flexibility and mobility that home ownership does not.

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New Zealanders are fixated on owning a home and how expensive housing is becoming. Why not rent? It has many benefits over owning a home.

The economics suggest renting is currently a better financial decision. The 2013 OECD Economic Outlook lists New Zealand as among the countries at risk of a fall in house prices, especially with borrowing costs now rising, and house prices relative to rents are 66 per cent above the long-term average, against 5 per cent for the overall OECD.

If housing was any other asset class, investors would have sold long ago, banked their profits and moved to another asset class. House prices relative to rent being 66 per cent above the long-term average suggests that it has never been a relatively cheaper time to rent.

As the OECD report suggests, it is difficult to see how house prices can go much higher with increasing borrowing restrictions and costs. And without significant capital gain, rental yields are very poor compared to other assets and one's money can do a lot better elsewhere. So putting your money in a productive, not over valued asset and instead rent may well lead to more wealth creation.

And then there is the real benefit of renting. Flexibility and mobility. If you get a better job elsewhere in the world, or you see a nicer place somewhere else, you simply call the landlord and provide four weeks notice. Easy. No sale, letting, rates, rent, maintenance, no mortgage hanging over you or anything else to worry about. Just move. And in this new age of a global work place, the ability to quickly move overseas or around New Zealand is an advantage.

Without a huge mortgage hanging over one's head, money is instead invested in productive assets and, even better still, allows entrepreneurial risk taking, like starting up your own business or following your dreams.

So why not use Chinese money for an overvalued, unproductive asset with very poor returns, and instead use our money for productive investments and do what we want?

Once you get past the emotional desire to 'have my own place', renting makes a lot of sense at the moment. Think about it.

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