Owning a house is not the NZ dream

I'm skating on thin ice with this one. Get the pitchforks ready.

Thin ice.jpg



We have all been sold on the dream of owning a home. It is a national obsession. If we don’t own a house, we should be striving to own a house. Get a good job, work hard, start a family and buy a house.

There are so many people giving advice with a vested interest in you buying a house. Your mortgage broker wants you to have a house. Your real estate agent wants you to have a house. Your bank wants you to have a house. Your insurance company wants you to have a house. Your lawyer want you to have a house. Your builder wants you to have a house. All other homeowners want you to have a house. Your local government and councils want you to have a house to lock you into the cities and regions and to pay rates and taxes. Pretty much everyone wants the housing market to thrive and will always have a biased, self serving vested interest to get you on board.  

We have been told facts such as house prices double every 10 years and that we can’t lose money. We are fed stories by real estate agents and all those involved in the housing industry that our lives are not fulfilled unless we own a house. Let me ask you – if the house is such a great investment, then why is the real estate agent selling the house and not buying it?

Other homeowners pay huge amounts of money to own a house in this country so they will never say anything bad about housing. People trick themselves into thinking their house was a great investment when it may not have been. All to make them feel better about spending all that money and to justify their decision. A house is only a good financial decision for some people, under certain circumstances. 

We fall for the propaganda hook, line and sinker. Our grandparents, told our parents, who told us how great it is. If everyone keeps saying how great it is we start to believe it without question. People who rent are made to feel like second class citizens. People are willing to spend way more than the true value of the house just to say they own a house. The problem is though, what may have been a good decision 40 years ago, may not apply now. With each passing decade, house prices are rising faster than incomes.




1/. The returns from owning a house barely beat inflation
Since 1993, houses have returned a nationwide average of 6.7%. This is before costs though. Let’s assume a $500,000 paid for house with a $400,000 30-year loan (5% interest rate). Annual costs (rates, insurance, and maintenance/improvements) of $10,000 increasing with inflation ($425,000), and a total mortgage payment of $773,000. If we assume inflation of 2%, the 30-year cost of owning the home is $1.2 million. The house is now worth $3.5 million. This is a 30-year profit of approximately $1.2 million, from an initial deposit of $100,000. That makes a 30-year return of 8.6%. This is actually a good return.

However, this is a best-case scenario. Houses being held for 30 years are not that common and inflation is typically higher than my 2% example. It also assumes a 30-year interest rate of just 5%. In 30 years, interest rates are bound to move higher. This calculation assumes there are no years of downward house prices which would make the returns even worse. A year of decreasing house prices is bound to happen at least once in 30 years. Finally, housing costs such as insurance and rates typically rise faster than inflation. This would make the 30-year average house price return of 8.6% harder to achieve due to the sequence of returns.

What if we lived in the house for just 10 years? (Still more than the 7-year average length of stay). Our return would be a $956,000 house, but after costs, a gain of just $130,000. Costs made up of $258,000 in mortgage payments ($183,000 in interest), $40,000 selling costs, $100,000 home ownership costs (insurance, rates, maintenance), and $326,000 to pay off remaining mortgage. Total 10-year home ownership costs - $724,000.

From our initial $100,000 deposit, this leaves a return of just 2.7% per annum. Barely better than inflation.     

Yet, most of us convince everyone that we have made a large profit. We bought the house for $500,000 and sold it for $956,000. We tell this story, totally disregarding the costs incurred of owning a home, which makes other people believe in the ‘dream’ of home ownership. Not only that, but we must now purchase a house in the now, higher priced market.


2/. Owning a house takes up a lot of time
Things frequently break that require our attention. Broken toilet, guttering, painting, staining, roofing, water blasting, appliance repairs, carpet repairs, and so on. We are forever fixing things in our home. Spending more time in Mitre 10 than any person should. This is time that could be much better spent with friends or family, or doing fun activities.


3/. It is risky
All it takes is for a gang to move in next door, a noisy dog to move in to the area, for all your neighbours to stop taking care of their properties, the development of state housing projects, or the closure of factories or schools, and the value of your property will either plummet, or remain static. If you are a two-income household and one of you loses your job, house repayments may become challenging. Just one event can change our situation completely, because we are ‘tied down’ to that one narrow location. All it takes is for one ‘motivated’ seller in the area to sell their house well below market value, and the value of our house will be dragged down with it.


4/. Housing doesn’t allow us to diversify
For many of New Zealander’s that own a home, the house takes up a very large proportion of our net worth. It can often be hard enough to pay off the mortgage, we don’t have much left to invest in other assets such as shares. This leaves many kiwis with 80% or more of their net worth in property. This is exceptionally risky as we are exposed to just one asset class. The cost of housing in New Zealand limits our ability to invest substantially in more than one asset class. We only tend to ramp up our savings for retirement once the house is paid off. It may be too late by then.


5/. Our needs and tastes change over time
The average length of time a New Zealander will move to a new house is 7 years. This is because our situations change, such as divorce, growing family, reducing family, and job relocations. And if it is not our situation that changes, our own personal tastes change. We grow old and tired of either our current house, or our current location. This constant need for change, results in more time and costs. It is timely and costly to move all the time. If we move to a new house every 7 years, we are more than likely to lose money from housing. Most of our mortgage payments would have gone to interest, not principal, and then we move up the property ladder to a new house, starting all over again paying all interest and not much principal. Not gaining much equity.

Yes, it may be true that renters move more often, but the big difference is in costs. Renters don’t have the substantial buying and selling costs that home owners incur. This is money down the drain that goes to lawyers and real estate agents.


6/. Houses are illiquid
This means that the value of our house is not easy to retrieve. We sometimes have to wait several months or even longer before we can get our cash from the sale of our house.


7/. It is harder to move
Because of the reasons above, it is harder to move locations should the need arise. It is big effort to get up and move as a homeowner. We feel tied down to our location, making it more difficult to accept job offers in other regions, or make quick decisions to move or travel.


8/. Interest rates
Most of us that buy homes need to pay for the house with a mortgage. As soon as we have a mortgage, we are at the mercy of the lending institutions. Interest rates have been extremely low the last 8 years. The average for the last 30 years has been approximately 7.5%. Because of high house prices, many people are borrowing close to their limits. Substantial interest rate increases will have a significant impact on our ability to keep up with payments.


9/. Houses in New Zealand are expensive
The median house price in New Zealand is $520,00 ($860,000 in Auckland). The median household income is $65,000 ($77,000 in Auckland). This makes a national house price to income ratio of 8:1 (11:1 in Auckland). The price to income is a basic affordability measure that tells us how many times a house is more expensive than our income. A number higher than 10 is considered severely unaffordable (spell check recommended I change unaffordable to affordable. Not a chance. Spell check must be a real estate agent). A ratio of 4 or less is affordable. So even our nationwide median of 8 times income is well beyond affordable. Auckland is the fourth most unaffordable city by this measure, in the world.

Up until the 1980’s, house prices were just three times household income. Four times by the late 1990’s, until a peak of 7.5 times median income was reached in 2008. This has remained relatively steady between 7 and 7.5 times all the way through until 2015. The last 2 years has seen that number cross to 8 times median income. This means that income rises are not keeping up with housing price increases, increasing the unaffordability of houses. It is only getting worse.


Another measure used to determine housing affordability is by looking at what percentage of spending housing takes up in our budgets. A general rule of thumb is we shouldn’t spend more than 40% of our after-tax income on housing costs. If we take a median income household ($65,000), purchasing a median house ($520,000) with a $398,000 30-year loan at a 5% interest rate, we can see that annual housing mortgage costs are $25,639. Add another $10,000 annually for housing related costs such as insurance, rates, and maintenance, and we are left with $35,639 in housing costs. This equates to 55% of our budget. Well over recommended affordability of less than 40%. In areas such as Auckland and Queenstown, the percentage will be even higher, leaving us even less money for other areas in our budgets such as food, transportation, travel, and savings.

There is one final measure that is useful when deciding how affordable a house is. Compare it to similar rentals in the area. In Wellington, where I live, a modern 4-bedroom home will sell for approximately $900,000. To rent a similar house would cost $4,400 per month. The 1% rule is a quick rule of thumb to determine if the rent you pay is less than the cost of owning the same home. The formula is monthly rent/house price. In this case, $4,400/$900,000 = 0.49%. By this brief back of the napkin calculation, renting in this market is financially far superior to owning.

Let’s see what a more detailed analysis finds: 


With a 20% deposit on a 30-year loan at 5%, renting will leave us with $4,500 per annum extra in the pocket. Yes, we will be gaining more equity in the house each year favouring the house decision, but I haven’t even included the cost of the $120,000 house deposit needed, favouring the renting decision. If the cost of owning a house is more than the cost of renting before even factoring in the house deposit required, this is not affordable by any stretch of the imagination.

If your own analysis fails all three of these tests, you know you have an overpriced house.


10/.  Owning a home is a large drain on our cashflow
Rates and insurance are regular costs that tend to increase every year at a speed much faster than inflation. House insurance costs in Wellington, since the earthquakes, have gone through the roof (excuse the pun). Of course, we have the regular mortgage payments. Then we have our constant need to keep making improvements to the house. We get tired of the kitchen, so feel the need to upgrade. The bathroom now looks out of date, so we upgrade that too. Yes, we will tend to get our money back for some home improvements when we sell, but it doesn’t change the fact that it costs a lot of our money that could be used elsewhere. Then, we have unexpected maintenance and repairs. We don’t know when these things will happen, but we better have some money ready for these events. Again, money that can’t be used elsewhere.

Even after the mortgage has been paid off, we still have the regular insurance, rates and maintenance costs which are not insignificant.


11/.  We never truly own our house free and clear
We may have got the bank off our backs when we have paid off the mortgage, but the house is still not ours. Local governments could decide to take the land off us if they wish.



This doesn’t sound much like a dream to me.

We have only discussed the negatives here, so it is a rather one-sided article, but I don’t want people blindly jumping into buying a house just because they have been sold on a ‘dream’. Not all is as it seems.

The current housing market is very expensive and unaffordable, yet young people are still striving to get onto the so called ‘ladder’. I recommend just take a step back and run your numbers. We don’t need to be in such a hurry to go head first into a heated market. We may get burned.

There is nothing wrong with renting, and it is not throwing away money as many suggest – refer to this article. In fact, we will be financially better off renting in many circumstances in this current market.

Owning a home is attractive for those that wish to raise their family, have pets, modify to suit your needs and taste without knowing you could be evicted on a couple of months’ notice. It offers a sense of security and that is a good thing to strive for.

The key is to at least recognise the downsides to owning a home, and see if the benefits outweigh the downsides for you. Just remember, the benefits of owning a home are not generally financial, unless you stay put for 20 years or longer. The benefits are more psychological. I know I will lose money on my house when I sell in 7 years, but to me the price of security of raising a family in a place we have made our own, is worth it and a price I am willing to pay. That is my dream and I understand the costs. If you have the same dream, but don’t understand the costs, your dream may turn into a costly nightmare.



The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here


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