Is it cheaper to pay a mortgage, or rent?

Brian from Mount Roskill

House prices are down, but rent rises have flattened.
In both markets, people looking for a home have the power.
So is it better, financially, to own or rent?
That's a question that ANZ economist Matt Galt has been pondering.
He said how the cost of renting compared to home ownership was a big driver of house prices.
"The balance between the running costs of owning a home over time - interest, council rates, insurance - and rents is one of the main anchors for house prices, to which they gravitate."
When the costs of owning a home are low compared to renting, both owner-occupiers and investors are more likely to buy, bidding up prices.
But when ownership costs are high relative to rents, house prices come under pressure.
To compare the cost of owning versus renting, he used the interest cost on a home loan with a 50 percent loan-to-value ratio at a five-year fixed rate, plus council rates, insurance, maintenance and a small buffer for other costs.
"What you often find is when you first buy a house, you have quite a big mortgage, like 80 percent loan-to-value for example, and when you have a big mortgage, the cost of owning a house will typically be quite a bit more than renting. But over the full time you own that house, hopefully you'll be able to repay principal and the LVR will come down and what we find is that the cost of renting and the cost of owning are about equal when the loan is 50 percent of the house value and that might be the experience over a number of years for some people."
In Auckland, the median rent is about $650 a week. Someone with a 20 percent deposit buying a house for $900,000 - the median price for first-home buyers in the city - would pay about $890 a week on a five-year fixed term.
But someone with a mortgage of $500,000 would be paying less than $620 as week.
He said between 2022 and 2024 high interest rates and other costs put downward pressure on house prices. At that point, it was a lot more expensive to own a house than to rent one.
But between 2019 and 2021, home ownership running costs were well below rents, which prompted some tenants to think they might as well buy if they could.
"I think a lot of people when they go to buy a house they'll look at what they might be paying in rent versus what they'll pay in mortgage and then they'll add on perhaps council rates or insurance and other costs as they learn more about the types of housing they are wanting to buy. If owning a house does look very cheap, like when interest rates were low in 2019 and 2020, it would really encourage people to jump into the market and they did in large numbers despite prices being very high at that time," Galt said.
"I think it does shape people's housing choices and particularly for investors as well, who will be quite carefully weighing up the rent income they receive versus the cost of owning a house."
Things are now back in balance compared to where they have generally been over history.
"Home ownership running costs have since eased as interest rates have fallen and overall are now more or less back in line with their historical relationship with rents.
"Interest is the dominant cost and also the main source of variation," he said. "The home ownership running costs proxy has dropped over the past month due to a sizeable fall in fixed mortgage rates over October."
But the story is nuanced.
"Changes in interest costs reflect not only changes in interest rates but also changes in house prices, as the proxy is for buying a house now. Over 2021, both were rising, which explains the particularly sharp increase in home ownership costs over that period."
Galt said several changes over the past year had brought ownership costs and rents back in balance.
"Home ownership costs have decreased as both house prices and interest rates have fallen, but this has been partly offset by increases in other ownership costs such as council rates and insurance. Rents have fallen a little, meaning home ownership costs have had to fall further to close the gap.
"The combination of falling rents and high council rates and insurance costs has been a significant drag on house prices in recent years, which has dampened the impact of falling interest rates," he said,
He said it was likely that five-year mortgage interest rates would rise a bit from where they are now through next year, but the comparison between renting and owning was not likely to change a lot.
"Our forecasts anticipate home ownership costs and rents staying in balance over the next couple of years, which points to broad stability in house prices, potentially with a modest increase in prices as the economy experiences a cyclical recovery next year.
"The current balance of these costs and benefits of home ownership certainly doesn't suggest that house prices are likely to race away.
"Overall, the market's looking quite well balanced at the moment. We are expecting the ongoing costs of home ownership and rents to stay roughly around balance over the next couple of years and that just reflects interest rates staying relatively low.
"We do have them ticking up in our forecasts towards the end of 2026 but that's very much a placeholder at this stage. The broad story is interest rates staying down for a while and house prices only increasing at a gradual rate next year as the economy recovers."
Council rates were likely to rise at a slower rate, he said.
"They increased 12 percent a couple of years ago, that's dropped to 9 percent and then we expect them to keep easing but still going up."
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