Rent, Save or Buy? Auckland

There is a lot of noise about a so-called shortage of properties in Auckland. An often quoted number of 30,000 homes for which I cannot find a source. If there is a shortage of homes then demand must exceed supply, but how do you measure that? I suspect a lot of the so-called analysis is assuming that all new immigrants arrive in Auckland and stay there. Assuming that every new household has 2.5 persons is also likely to be just wrong. What can be measured is the number of listings for rentals, which is the same as it has been for 8 years,i.e. demand is not high, rental prices are not rising fast, so how can investors driving price be related to supply?

I thought of doing a simple bit of analysis, find out how rents, savings interest and mortgage rates interact. The result is interesting. My interest is in Wellington where there is a new price surge happening - is this due to a shortage of homes? To make the comparisons simple to understand, I divide everything by average household income at the time of each comparison, this also removes inflation.

So you want to live in a $500k home in Auckland (as a tenant or owner)

Comparing the Rent or Buy decision first, using Mortgage rates and rental prices, plus my knowledge of house prices in Auckland at the optimum rental value,i.e. $900k homes, including rates and maintenance(both ~$3,000 in 2015, CPI adjusted back in time)

Rent or Buy Decision Options:

Unlike Wellington, the market isin a second speculative burst, very much like the 2005-2008 market. It was a lot better to rent than buy in the high price growth period of 2004 to 2009, it became equal for a short while until 2013, but then it has returned to the noughties. The reason it is better to rent at thepresent time is that interest rateskept the cost of borrowing $900k well above the cost of renting a $900k home where rents have not kept up with prices. It pays to rent in the short term, but you miss out on capital gains— OR are secure if a marketcorrection occurs.

Yes Homes AND rentals are becoming less affordable, rising from 25% or 50% (20% in Wellington) ofhousehold income in 1994 to 34% now (26% in WN). Isuspect these are better homes due to new regulations , especially the raft of new ones that cam between 2005 and 2008 - you can even see the impact on rising rental prices in Auckland just like Wellington.

Invest in Bonds or Homes as an Investor?

How about we look at similar data, also normalised to household income, but from the point of view of an investor. Lets say you have the $900,000 funds to either invest in a home or to put the money in interest earning bonds, which is the better investment?

Buy a Rental or Deposit in the Bank Options?

During the boom, it was clearly best to invest in the bank on a day-today basis (ignoring capital gains), but for a while it has made little difference in Auckland, especially since the GFC. But that changed when in 2014.

However, the income from an investment big enough for an Auckland house recently rose well above the income possible from rents from 2014 due to rental yields falling as house prices rose. Then interest rates dropped again in mid 2015, term deposits became less attractive so it was a bit easier to justify buying, even though prices were high. Capital appreciation now looks more reliable. The latest numbers suggest a third spurt of speculative investment has begun, but wait! Notice in the last 2 months - the tiny dots on the end of the chart, that rents rose to match interest on your $900k, that makes it equal to invest in houses or in the bank this month.

Expanding the charts for just last few years:

There is astrong speculative probability in Auckland but, while house prices are growing, so are rents, making it rational to invest in Auckland at current prices, but house investment depends on rent rises continuing and maintenance costs staying constant. Capital gains may continue or fail, that is the risk.

An interesting, and related issue is the continuing increase in rental prices as a proportion of household income, 20% to 27% over 2002 to 2009. Is this due to the increasing quality of homes forced by new regulations? It certainly matches the period of quality changes from 2005 to 2008 when a lot of rules on insulation and wind strengthening were introduced.

Note there does not appear to be any relationship to immigration!

Jonette 2011