Are you scared of NOT buying a house?
03 Oct, 2021
I received an email recently that brought tears to my eyes if I’m frank. It was from someone who is in despair about not being in a position to own a house in New Zealand. I wanted to create a blog post about it because the struggle that the writer is experiencing is not unique; in the same week, I received several other messages along the same lines. If this feels like you, or perhaps a friend or someone in your whānau, I wanted you to know that you are not operating in this world all on your own and that if you can’t (or don’t) want to buy a house, there are alternatives.
There are many good options out there, and this blog post aims to help give people like this emailer the confidence and courage to go out and explore them.
With all identifying features removed, I wanted to share the email and give my response to it.
Kia ora Ruth
Thanks so much for all the great content on personal finance. I came to New Zealand almost ten years ago, and I have to say I'm finding it really hard. I wondered if you would please consider writing an article about navigating the first home buyers market in NZ's current climate?
I'm in my early 30’s, have a good job, am recently single, and not living in Auckland. But I am just so overwhelmed with getting into the housing market and finding steady feet for myself. So many of my friends, especially the female singles, are in the same position, and we are quite honestly scared.
For me, even with an almost $100,000 deposit and the promise of getting housemates to share costs, the bank wasn’t optimistic about my ability to lend from them. I am so scared of taking on such a significant financial risk, but I don't want to rent forever or miss out financially because I haven't bought a house.
I weigh up whether it's just better for me to leave New Zealand to secure myself financially and perhaps have children in the future, rather than taking on such huge mortgage debt by myself here. Or do I stay and just save hard until I have a 20% deposit. It's tearing me up inside! I listened to your recent podcast on the couple who are 35 and mortgage-free, #58 Leaving the big city for the Good Life, and it actually made me cry because I just feel so far behind.
I know you can't give financial advice, but what would you say to someone who is a nervous single-income homebuyer? Should I just go for it, buy a house and deal with things as they come up? Just "suck it up", act with confidence, get some housemates, spend all my retirement savings and deal with the fact that $500,000 in debt is just what I have to do? Once I’m on the housing ladder, I can try to claw back my retirement savings and follow The Barefoot Investor?
I feel like I have tried my best, and I'm still so far behind. I get really stressed because I feel like I am stuck on Level One. I never thought I'd have to contemplate spending my retirement savings on a house deposit, which makes me feel even farther behind.
Thanks so much for reading.
Unfortunately, my replies have gone unanswered, but this is sometimes the case. It’s pretty cathartic to write your hopes and fears down and send them away to a stranger. Indeed, people are often surprised that I write back, and sometimes when I do, they have already moved on. As long as they know that someone has heard them, I’m okay with that.
Either that or my email went into their spam folder.
Combined with several other messages I have received over the last couple of weeks, the overall feeling from me is:
I am annoyed at Aotearoa and our housing market. I think in many ways, we have fundamentally lost sight of what a house is for; to provide a home. It’s become a money-making machine for so many, and it’s to the detriment of others. When did we all become so greedy?
These women I hear from are wonderful people. They have done so much right, such as managing to move themselves to a whole other country for a start. You don’t do that if you’ve got no get up and go. They have secured a great job. They have friends; they have a social life. They have saved up a chunk of cash, and that certainly doesn’t happen by accident!
Their extraordinary successes are being overshadowed by the pressure to buy a home. A home is not the be-all and end-all, it just isn’t, and I’m quietly quite pissed off that you are made to feel this way.
The government and the Reserve Bank ARE trying to slow down the rise in house prices and make renting a more viable option, and surely house prices will tap out at some point as ‘the market’ decides what price point is a step too far. But in a housing market driven by a lot of straight-up greed, which is just that much harder to legislate for, you can only control what you can control. So if buying a house is off the table (for now), what are your options in the meantime?
Can’t or don’t want to buy a home? Not buying a home does not make you a lesser citizen.
If you find yourself renting, you might as well see the positives.
What’s so great about renting?
Freedom to move about
When you rent, you have much more freedom to live exactly where you want. Are Central Otago winters too cold for you? You can pack yourself up and move to a beachside town somewhere well north of here. The current job market is buoyant, meaning you can move if you want to and pick up a new job or work from home as many of us do. Are you renting in a suburb of a big city and are bored by the lack of nightlife? You can move into the heart of the city instead. I envy the freedom that a renting person has to move quickly; no homeowner has that flexibility.
Once a homeowner, not always a homeowner
I know plenty of people who have moved back and forth between homeownership and renting over the years. Why? Because owning a house was more of a liability than an asset at times, so they sold up. Whether renting or owning, their key was that they always invested a portion of their income for ‘some later use’. Always. It was not a house that gave them stability; the financial buffer they created for themselves did.
Lovely house vs Gross house
The last couple of houses I rented were nice newish houses. But the first house I purchased, while not a dump exactly, was a complete (and expensive) do-up from top to bottom. When you rent, you can afford to find a nicer place, but when you buy, you often start at the very bottom of the housing ladder and spend a fortune bringing it up to scratch.
Shared housing is cheaper
If you are in a shared housing situation, your living costs are far cheaper than owning a home, which frees up money to invest. If the weekly rent is $600 and you are one of three, your housing costs are just $200 a week, plus a few amenities like power and water. Far below any homeowners expenses, yet your incomes are likely the same.
Living with others
You can live with others yet be completely independent. In the last week alone, I’ve spoken to two people who currently live in shared housing, they share all the costs of the home (rent/power/water etc.), yet due to the home’s design, they barely see each other. Just the way they both like it!
Conversely, if you enjoy having people around, finding that perfect housemate to share a glass of wine and cook dinner with is perfectly possible.
If it breaks, you don’t have to fix it
If something breaks when you are renting a home, it’s not your expense to fix it. Oven breaks? The landlord pays. Roof leaks? The landlord pays. Plumbing playing up? The landlord pays. And let’s not forget all the typical costs that come with owning a home: council rates, insurance, mortgage repayments. Yep, you guessed it, not your problem.
Your income stretches further
If you make $1,000 a week in your job and rent a home with housemates, you may pay $200 in rent but have no other housing-related expenses as such. The majority of a renters income is theirs to keep, and not so with homeowners. So, what can you do with that income? Well, that’s where renters have the advantage over homeowners.
While a homeowner is buying back their home from their bank one brick at a time over the next 30 years, they are building equity in a home that they can only really utilise if they leverage against it to buy more houses. Or they have to sell to get money out. A person who rents can invest their leftover money every week into their KiwiSaver and the share market. And from day one, that investment begins to grow and compound over time. At any point that money is accessible, it’s a liquid asset, not so with homeownership.
If you are renting a house right now, your costs are far lower than the homes ‘owned’ by people on either side of you. Yet your income could quite possibly be the same. And that’s a powerful position to be in.
Rent money is not dead money
We need rental properties in every town and city across Aotearoa because there are citizens for whom buying a home is not appropriate for them at their stage of life. It would act as a considerable handbrake. I know a wide range of people who are nomadic by nature; they bounce around the place following their careers and interests and owning a home would be a significant impediment to this. So, when you choose to rent, that’s the best allocation of your money at that time; it’s not “dead money”; renting has afforded you convenience and freedom.
The not so great joys of renting.
The elephant in the room.
Your landlord. I’ve had some terrible landlords in my time; one was genuinely psychotic, so that was a fun experience. Not. Many landlords are just people who bought another house to rent out. No skill is required. And some people suck at it. But I’ve also experienced what it’s like to have an excellent landlord who provided me with a home, and when I moved on, it was my choice to do so. Good people are everywhere, and some of them own rental properties, so find those good rental property owners through advertising or word of mouth and rent off them. Be the best tenant you can be and ask for a glowing reference and referral when you choose to move on.
Check the terminology
Find that property owner who has entered the rental market for the right reasons, to provide a long term home for someone, not the person who is just waiting for the equity to build so they can sell it and evict you. Learn the difference and do your research to find the right property for yourself to settle in for the long term - if that is what you want to do.
If the house owner refers to their property as an “investment property”, you are in trouble. If the capital gains hit their magic sweet spot, then guess what, your house is going on the market soon and there is nothing you can do about it. If they refer to it as a “rental property”, then chances are they are in it for the long term and are all about providing a long term living situation for the people who live there.
Unstable housing situation
The last time I rented, we had to move twice within one year because the houses were both put up for sale. All it takes is for the landlord to change their tune, put up a for sale sign, and you can be forced out, and that is a big downside, particularly if you have family and pets as we did. Perhaps in time, tenants will be given more certainty around this, and you can negotiate a longer lease with more stability for your whānau and a guaranteed long term income for the property owner. Tenants should have stability in their housing, and landlords should have a stable income.
House to income ratio is screwed up
FOMO is real, and when you hear that “interest rates are at record lows and debt is cheap, now is the time to buy a home”, it can be a convincing argument. However, the chances are that your salary is not at a record high to keep pace with the record cost of housing.
Simple example:
When Jonny and I bought our first home, we earned about $70,000 a year and paid $150,000 for a house (which we then spent a fortune on renovating, I should add). It was two times our annual income. Our incomes then grew, and we paid our home off quickly. Today we earn about $80,000, and our house is valued at about $850,000; that’s 8.5 times our income. The difference between then and now is VAST, so people are wrong when they say you have to buy a house at all costs because the cost for many is far too high.
Run towards something, not away from something else
I hear from people who are desperate to buy a house, not because they desire to have a home, but because they prefer not to be screwed by a landlord who can adjust their rent and where they live at any time. In the ideal world, you would save up and buy a home because it’s the right thing to do for your emotional and financial stage of life, not feel like you are forced into it at all costs. It’s a complex problem to solve.
Moving right along...
Let’s end that conversation because you know all this; you only have to turn on any form of media to hear about our housing issues and all the arguments for and against any perceived government action or inaction.
Now, time for some solutions!
You can do it! It’s within your power to buy your own home if that is what you want to do, but it is all on you. You have to go without, be committed and be prepared to pursue your goal relentlessly. It will take time, many years, and it won’t be easy, but so what. Do it anyway.
Or, you can have financial freedom without owning a home because less of your income is being poured into a house when you rent. IF you can find a good property to rent, at a reasonable rate, in a location you like, and you have a good source of income, then it’s absolutely within your reach to be financially free.
The key is not to let your rent and your living expenses suck up too much of your paycheque, and this is getting harder and harder to do as property investors overpay for housing and then try to pass those costs on to tenants in higher rent.
I know that it is tough to rent in many cities in New Zealand, but I also talk to people all over New Zealand who have good jobs and reasonable rent in good houses. These are single people, married couples and people with kids. So, if you are like the person who wrote to me and have the get-up and go to move to a whole new country, then perhaps employ some of that adventurous attitude and flexibility and move to another location to get your housing costs as low as you can so that you can then save and invest.
I know that sounds unpalatable to some. Why should you up and move, especially if your skills are needed in that town? I know you might be saying, “easy for you to say, Ruth, sitting there in your nice whare”, but quite honestly, what choice do you have?
Control what you can control.
This is what we did. When we decided to buy our first home, we moved from Wellington to Christchurch, where housing was much cheaper, and work opportunities were good. Then when we lost that house in the Christchurch earthquakes and the housing market was horrendous, we again uprooted ourselves and moved to Central Otago and into our second home. I couldn’t be bothered trying to stay and fight a market so stacked against us; life is far too short for that.
Investing is forced savings, just like paying a mortgage
While some people like the thought of having a mortgage because they see it as a kind of “forced saving”, I’d like to think that my blog readers have better self-control than that. You don’t need to take on a truckload of interest incurring debt and have a banker breathing down your neck to ‘make’ you save.
You can instead take your after-tax income and invest it because the fact remains that the share market outperforms the property market over time. In her book A Richer You: How to make the most of your money, Mary Holm goes into well-researched detail about this. The property market is not the only way to make money. Oh no, it’s not. Investing in the share market is a fantastic alternative.
And this is where people who rent have a massive advantage over people paying off a house. You have spare cash to invest in liquid assets that have good returns.
You don’t get a free pass on saving and investing just because you rent
If you are not going to buy a home right now, you have to actively create wealth in another way, using another asset class.
You have to be a good manager of your putea (money); you can’t say, “oh poor me, I can’t afford to buy a home,” and then blow all your coin.
Please don’t waste your money on stuff that brings you temporary joy
A friend of mine works in banking, and his observation is that many people who rent are not disciplined enough to pay themselves first. Their investing happens with leftover money at the end of the pay cycle. If you go about it this way, unsurprisingly, there is often not that much putea left over. It’s so easy to treat yourself constantly and spend all of your money. I know! I have tried it many times.
You need to treat your investments like the banker treats your debt:
Pay your mortgage on time, every time or they will come and take your house!
Pay into your investments on time, every time. No excuses!
Just like mortgage payments, your investment needs to be Priority #1.
That’s how I structure our investments. I have an automatic transfer at the same time every Tuesday (the day after I’m paid) that syphons off money from my cheque account to a savings account. On the 20th of each month, I invest whatever is in that account (plus any extra I can scrape together). I then get to spend what’s leftover after I have paid myself first. This often means deferring things I might want and/or saving up for them over time. I never miss an opportunity to invest in our KiwiSaver funds and our index fund/ETF investments.
Ever.
Because by doing so, I’m sticking to the deal I made with myself, to pay myself first, I’m prioritising my financial future. I budget for everything so that I can do this.
WHY? What’s the point of investing?
I’m planning to have enough money invested to cover all of my family living expenses. The way I work this out is using something I refer to often, the 4% Rule. I’ve calculated my annual costs and multiplied them by 25. This gives me the amount of money I need to invest in assets to replace my income fully: e.g. $40,000 annual expenses x 25 = $1,000,000
With $1 million invested in low cost diversified index funds/ETFs, I can then pull off 4% each year, which of course, is $40,000.
This should be the goal you have in mind, to invest as much as you can, as fast as you can, so that you can create a passive income that could, in turn, pay your rent.
Take the example of the person paying $200 a week in rent, or $10,400 a year. Multiplied by 25, that’s $260,000. If you can invest that amount of money, you then pull 4% a year; that’s your rent paid.
Of course, rents change, but you get my point? Invest in assets that return you an income.
I interviewed Andy in Ep. 59 of my podcast recently. His initial plan was to buy a house, but he had nowhere near enough for a deposit, and it was stressing him out. So he took the investing approach instead, and he has come a long way in a concise space of time and had managed to save and invest $100,000. He is already a third of the way there to cover his rent, and I have no doubt he will continue to grow his investments. Given enough time, he will be able to generate enough passive income to cover many other expenses.
For now, he has decided that living in central Auckland and renting with his partner is where he wants to be, but he is also thinking about the future. Building up investments will allow him to offset future rental costs, OR this might form the basis of a hefty house deposit in the years ahead. He is creating options for himself.
You can rent and be fine. You don’t need to buy a home to be stable; if anything, if you over commit yourself, it can make you unstable. It may give this emailer some solace to know that I hear from many people who have purchased a house but are now realising that all of their income goes to that; they have a home at the expense of all the other things they used to enjoy in life.
The people I see who are less stressed about housing treat every $100 they earn with the utmost respect. They:
Know their net worth
Budget well
Keep their living costs low and get a well-paying career
Wasteful spending is at a minimum
They stay out of any form of debt
Have an emergency fund
Pay into their KiwiSaver
And push as much into investments as they can
They are facing the housing crisis head-on and controlling what they can control. They may be renting now, with plans to buy a home 3-5 years later. Or, they may choose to stay renting. Like Andy, they are creating options for themselves.
What can you invest in?
If you have read my blog for any length of time, you know what I’m going to mention here, it’s boring yet surprisingly effective:
Index Funds or ETFs + regular contributions to your KiwiSaver
Just a couple of low fee funds that buy the entire market and our KiwiSavers are hands down the best way I have found to grow our wealth over time. Yes, our whare has gone up in value, but it’s unusable equity, and I don’t even think about it in terms of an asset. It’s our home, and we have to live somewhere.
What I get excited about is the potential of our investments, and I’ve blogged many times over the last five years about how we invest: Does investing in Index Funds or ETFs work?
I mention KiwiSaver, not because I see it as a first home deposit, but because I want you to keep it intact and get to retirement with both a house (if you choose to buy one day) AND an entire retirement fund.
I’ve also mentioned JL Collins The Simple Path To Wealth more times than I can count, and I urge you to read his book or read his blog Stock Series from which he wrote his book or hear him interviewed on the ChooseFI podcast. You can rapidly educate yourself about investing in something other than a house, and you can get started NOW.
In New Zealand, we have many providers who make investing straightforward. It is not complicated. You don’t need a stockbroker and the fees to take part are low:
The only thing you need to be mindful of is keeping your investing SIMPLE. All of these platforms offer more choices than any of us need. Just remember that you don’t go into a supermarket and buy one of everything, so you don’t need to do that here either!
You can start immediately with $5, and with focus and discipline - just like paying a mortgage - you can grow your wealth over time.
A couple of other resources for inspiration are from those who have either reached financial independence without housing or have worked themselves into a position to buy a home eventually:
Quit Like A Millionaire by Kristy Shen and Bryce Leung
Playing With Fire: Financial Independence Retire Early by Scott Rieckens
ChooseFI: Your blueprint to financial Independence by Mamula, Barrett and Mendonsa
Money lessons for my younger self: A guide for young adults by Nick Carr
And this podcast is where I interviewed Hamish, a Kiwi with a burning desire to buy a home. It took grit, discipline and time, but he did it. 50. An investor with military precision!
This recent podcast from She’s On The Money: Is renting forever an option? - is a must-listen for learning about the positives for those who are renting.
You are uniquely awesome.
My thoughts for anyone stressed out by the housing situation is to focus on YOU and your immediate situation; control what you can control. Turn off the 24-hour news cycle which is focused on attention-grabbing headlines and fear when it comes to housing. It is excellent clickbait, but it is making you feel like a failure. And you are not a failure. While I want to see you in your own home, if that is what YOU want, a huge mortgage can be debilitating and limit you. Just because you can borrow it does not mean you should. You can choose to rent and create wealth elsewhere, and renting actually has several positives to it as well.
Give yourself a break, for god’s sake. Focus on what you have achieved and done well in the last 12 months and over your lifetime. Focus on the positives. You are a whole person; you are not just a house deposit in the making. There are more positives to your life than negatives, so focus on them, zero in on what you do well and put your energy and money into that. Become a well-rounded person with a diversified life and investment portfolio. Get your own financial house in order so you can be prepared for the future, whether that includes a home of your own or not.
I hope that helps?
