Why Renters Need a Long Term Plan

The rate of home ownership in New Zealand is falling. Just under 65% of households owned their own home at the time of the last census in 2013, and this is the lowest it has been since 1951. The rapid increase in property prices since 2013 has no doubt further eroded this percentage. The flip side is of course that more people are renting and either delaying the purchase of a first home or choosing to rent long term.

Affordability is only one reason people rent. Other reasons include the flexibility to be able to travel, the desire to live in a more expensive location, perhaps close to work or close to good schools which would otherwise be unaffordable, and freedom from the responsibility and cost of house maintenance. These are all sensible reasons to rent, however renting over the long term has serious consequences for retirement.

The fact is, NZ Superannuation is set at a level that covers basic living costs but not rent or mortgage payments. If you don’t own a debt free home in retirement, you will need a big chunk of money, probably at least half a million dollars, to finance your rent payments for the rest of your life. That’s around the cost of house in a mid-sized town.

There are two ways of building this wealth. The first is to save very hard out of income. The second is to borrow money to invest. Borrowing to invest only makes sense if you are investing in a business or in property. For most people, property is the easier option.

The answer’s obvious. If you choose to live in a rented home while you are working, play it safe by investing in a rental property, preferably in a location you would be willing to retire to.