01-03-2013
Can any worker can own a home?
Can any worker can own a home?
After last months article on housing affordability, where I looked at reasons why we do not have a housing crises, I started to wonder if in fact anyone who was employed could own a home.
As a participant in the rental property industry, in theory I should promote that all New Zealanders would be better off renting, but this wouldn’t be true. While there are some definite advantages to being a tenant, over the long term there are sound financial benefits to owning your own home.
I believe individuals should start saving for a home as early as they can, as the task only gets harder as our commitments tend to increase as we get older. As a young person we can take on flatmates to help pay off the mortgage, but this is less likely if you have a family.
I also believe that first home buyers should not expect to own a brand new house or a house that their parents may be able to afford. It has never been easy to buy your first home and your best bet is to buy the worst house in the best street of an affordable area. You can then add value to the property and increase your net worth by fixing it up.
My advice to first home buyers has been to spend no more than 30% of your income on rent (much less if you are young and flatting), save 20% of your income for a home deposit and make sure you can live off the remaining 50%. In this way you can save your annual salary over five years and use this as a 20% deposit on a property worth five times your annual income.
To check if this would be feasible I developed a calculator to test this theory for different income levels. The equation gets quite complicated because of different tax rates, grants and allowances plus adding realism into what you must pay in rent.
To simplify the equation I developed the calculator for a one income family with two kids living in Auckland. This seemed to be the group who would find it hardest to get into home ownership.
Through this exercise I found that a family on the minimum wage would have to spend 42% of their income on rent to afford a reasonable rental property. This meant they could only save 8% of their income and it would take them 8 years to save a home deposit. Despite this, they could buy a home valued at $220,000 and have it paid off in 29 years. In other words, if they started saving at age 28, they could have a debt free home by retirement age.
While $220,000 won’t buy them a palace, there were 350 properties listed for sale in Auckland at the end of January, so it would seem possible. They could decide to get a 3 bedroom stand alone house further out from the city or a 2 bedroom unit closer in. As their equity and hopefully income increases over time it is likely they could upgrade their home at some point in the future.
The idea of a Home Affordability Crisis is a myth. It has always been hard to buy your first home. What we really appear to have is a Housing Expectation Problem and a Housing Priority Dilemma. We expect more house than we can afford and we prioritise other spending in front of saving for a home deposit.
You can few the Housing Affordability calculator at www.NZPIF.org.nz/afford-a-home.