Rent Versus Own & why the Economist got it Wrong
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Articles by Matthew Gilligan
We are scratching our heads at GRA, wondering if the world has gone completely mad. To say we are astonished at the opinions of one particular economist, Shamubeel Eaqub, whose comments were recently published in the New Zealand Herald, is putting it mildly. He said that New Zealanders are better to rent, rather than buy a property to live in. Is he insane?
He reasoned that the costs of owning a property, including mortgage expenses and property maintenance, meant homeowners were making huge losses, and that they'd be better off renting and investing in the share market instead. He likened buying a home to buying a business that was making a loss. This is almost complete bollocks, and we'll explain why.
1. He is ignoring the capital growth benefits of owning a property. Admittedly, he could be right about small towns, where capital growth is less than assured, but he's crazy to suggest this in places like Auckland, where due to high demand and scarcity of housing, capital growth is high.
2. He is ignoring the power of leverage. Unlike shares, you can borrow most of the purchase price of a property, but you still receive 100% of the capital growth. Even after taking all costs and expenses into account, and assuming the same capital growth rates, property far outperforms shares because of this leverage.
3. He is using averages, when in fact people start buying in below average areas to get into property. They climb their way up into better suburbs by adding value and allowing inflation to devalue their debt.
4. He is ignoring the fact that the average person squanders any surplus income they have, rather than putting it into other investments. Buying a property on the other hand, acts as a forced savings programme, which makes people disciplined.
5. He assumes that everyone buys at market value, and that no one adds value. Most households climb the Kiwi battler's property ladder by doing the garden, painting the house and renovating with free labour (their own) to increase value.
6. If we took his advice, in the last month alone we'd be 5.6% behind the 8-ball, and 7.2% behind in the year to September, as Auckland house prices have skyrocketed and are likely to keep growing at 6-10% per year, depending on what suburb you're in. If we'd followed his argument long-term, we would have wiped out years of differential cost/benefit and be considerably worse off.
We wonder if perhaps he is the most naïve economist on the planet? We think he should keep his business views to himself, and concentrate on maths and economics. Clearly the business of property (and we daresay the basics of the effects of leverage and how to buy a property at a discount) are lost on him.
We're sure we're just saying what's on the tip of the average Kiwi's tongue - What a load of bollocks, Mr Eaqub!
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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