According to Core Logic New Zealand data released in March 2019 the length of time that properties are being held onto before they're sold is 7.4 years and a more recent article in the Otago Daily Times dated July 2022 suggests as at the end of 2020 this number was more like 6.5 years.
Most Kiwis that own their own home keep most of their net worth in their home on the assumption that their house is a good investment and that it would only increase in value.
Historical data tells us that housing tended to appreciate in value at the rate of inflation. At the time of writing this article, the inflation rate in New Zealand is currently running at 6%.
The average median house price for a house in New Zealand is $891,585 according to the price index statistical data released by QV in June 2023.
Taking the above data if you purchased a house today at $891,000 (round figures) at the current rate of inflation your house would be worth $1,263,901 after 6.5 years, which means that you would have a capital gain of $372,901.
… Sounds like a great investment right?
Ok, before we get too carried away let’s look at the associated costs of owning the house.
First up you have fees to buy the house. Typical conveyancing fees vary and can be anywhere between $1,500 and $3,000 but for this exercise let’s assume $1,500 to be rational.
Now let’s take a look at the ongoing costs like rates, insurance and maintenance. Rates vary from region to region but we’ll use the average of $2,644.00 per annum according to the 2022 Ratepayers report released in September 2022. $2,644.00 X 6.5 years = $17,186.00
Insurance is based on the square meterage of your home, so this also varies. In New Zealand house insurance is sold on a “sum insured” basis. The most commonly used tool is the Cordell Calculator, which is used to gauge what your house would cost to rebuild. Once again for this exercise we will use a conservative premium of $150.00 per month or $1,800 per annum. $1,800 X 6.5 years = $11,700.00
Unless you have a newly built home with a builders warranty then annual maintenance can be calculated at between 1% and 3% of the purchase price excluding the land. This covers things like plumbing, electrical, painting and other unexpected repairs. Let’s use the conservative number of 1%. $891,000 X 1% X 6.5 years = $57,915.00.
… Now after the 6.5 years you decide to sell and take your equity out as the average home owner in New Zealand does. Don’t forget that selling also attracts costs such as Real Estate fees, conveyancing fees and removal costs.
Typical real estate agents fees vary and are usually worked out on a scale, with the first $400,000 at 3% and then the remainder of the sale price at 2%. They also charge an advertising fee or administration fee. This can also vary but conservatively we will say $500.00.
Now to sell your $1,263,901 house it would cost; $400,000 X 3% = $12,000 plus $863,901 X 2% = $17,278.02 plus the advertising / administration fee of $500.00
A total of $29,778.02.
Don’t forget the conveyancing fee again, so factor in another $1,000.00.
Here’s a summary so far
Conveyancing fee to purchase $1,500.00
Rates $17,186.00
Insurance $11,700.00
Maintenance $57,915.00
Real estate agent fee to sell $29,778.00
Conveyancing fee to sell $1,000.00
Total $119,079.00
Now your house has cost you $119,079.00
Equity gain of $372,901.00 less $119,079.00 = $253,822.00. That’s 32% of your investment gone.
That’s not so bad; you’re thinking I’ve still got 68% or $253,882.00!
...Well, here’s the next thing. In this example I assumed that you paid cash for the house without mortgage finance. But like most Kiwi’s you didn’t do that.
So let’s now assume that you had a 20% deposit and borrowed the other 80% of the purchase price. That’s lending of $713,268.00.
$713,268.00 at today’s best mortgage rate with a main bank (not a non-bank lender, that’s even higher) at 7.10% you would pay total interest of $179,272 over the 6.5 years. Remember also that your mortgage repayment goes mostly toward the interest in the first ten years so the principal amount paid off your loan is minimal.
Let’s see how we’re tracking now …
Conveyancing fee to purchase $1,500.00
Rates $17,186.00
Insurance $11,700.00
Maintenance $57,915.00
Real Estate fee to sell $29,778.00
Conveyancing fee to sell $1,000.00
Mortgage interest $179,272.00
Total $298,351.00
Equity gain of $372,901.00 less $298,351.00 = $74,550.00
That’s 80% of your investment that you were supposed to get, now leaving you with 20%
Remember too that these assumptions are based on minimal expense calculations and high inflation rates so this could be considered your best outcome.
If you are starting with less than 20% deposit you are classed as a low equity borrower, which presents a whole new set of rules. Now the lender will also require a registered valuation, which costs around $850.00, a builders report to ensure their security is a sound investment, which will cost around $700.00 and lenders mortgage insurance (LMI) equal to 1% of your loan amount. LMI will cost a further $7,132.00. Also remember that this gets added to the loan and you pay interest on that over the term of the loan as well
This now takes your Kiwi dream of home ownership to a whole new OMG!
Let’s see how it looks –
Conveyancing fee to purchase $1,500.00
Rates $17,186.00
Insurance $11,700.00
Maintenance $57,915.00
Real Estate fee to sell $29,778.00
Conveyancing fee to sell $1,000.00
Builders report $700.00
Registered Valuation $850.00
Mortgage Interest $181,065.00
Total $301,694.00
Equity gain of $372,901.00 less $301,694.00 = $71,207.00
That’s 81% of your investment that you were supposed to get, leaving you with 19%
Well, you’re still thinking that you could live with this; after all it’s the Kiwi dream! Right?
Possibly, as long as you can avoid the Brightline test. If you don’t know about the Brightline test, this is a sort of capital gains tax in disguise. I don’t provide tax advice and it is best to talk to someone that does, however if you buy a house now and sell it within 10 years you are subject to the Brightline test, meaning that you could pay tax on the capital gain from the sale. Now your 20% could well be a lot less.
Summary
If you manage to satisfy the Brightline test and don’t have to pay any tax and you manage to keep all the calculated costs at the minimal level at best you will have made 20% on your investment over 6.5 years, that’s around 3% per annum. If you are a low equity borrower, the return is slightly worse at 2.92% per annum. If you recalculate the costs using the higher of the estimates in this report then chances are your investment could now be a liability.
So should you rent instead?
Which brings about the question, should you rent instead? This depends on your goals; however when you rent or lease a property you pay one set amount each period (weekly, fortnightly, or monthly). You don’t have the expenses associated with house insurance, rates or maintenance, legal fees, valuations, builder’s reports or real estate fees. Not to mention the stress and forecasting involved in predicting mortgage interest rates, possible changes in Government policies and asset testing.
Your rental or lease amount remains the same set amount throughout your contract. This can also provide solace by focusing on future financial planning and utilising those same financial resources to invest wisely with possibly better returns and potently less stress.
In the case of the Christchurch earthquakes those that were renting had the choice to walk away and setup elsewhere. I say this tongue in cheek, because rental stock in the region had also been severely reduced, it was very traumatic, it disrupted families and those with work commitments also had other issues to contend with, such as increased travel time and expenses.
The point I make here is that the home owners didn’t have the freedom of choice to walk away because they were tied to a major financial commitment, their property. Their financial commitment took years to resolve with insurers costing many investors tens of thousands of dollars.
Walking away was not an option because property values plummeted and took a further ten years to recover to the same pre-quake levels, bankers held mortgages over those properties, which in some cases were now valued at less than was owed and it took years for repairs to get underway many of which had to be redone to a higher standard due to poor scope of works and repair methodology.
References:
Average property ownership period in New Zealand
Median house price in New Zealand.
2022 Rate payers report.
Cost of house insurance in New Zealand.
Home maintenance costs in New Zealand.
Real Estate agent fees in New Zealand.
Mortgage rate calculator – the cost of borrowing.
Lenders mortgage insurance (LMI)
Inland Revenue - Brightline test
