Is it cheaper to pay a mortgage, or rent?
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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Poll: Is it ok to regift something that you have been given?
🎁 Holiday Gift Chat!
Do you ever regift?
What’s your take on asking for a receipt if a gift doesn’t fit?
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79.1% Yes! It's better to regift what I don't need
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20.9% No. It's the thought and effort that matters
Poll: 🗑️ Would you be keen to switch to a fortnightly rubbish collection, or do you prefer things as they are?
Aucklanders, our weekly rubbish collections are staying after councillors voted to scrap a proposed trial of fortnightly pick-ups.
We want to hear from you: would you be keen to switch to a fortnightly rubbish collection, or do you prefer things as they are?
Keen for the details? Read up about the scrapped collection trial here.
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83.4% Same!
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16.6% Would have liked to try something different
Why we need cash to stick around----Cash is king – Using notes and coins to pay for everyday goods and services is quickly becoming obsolete. When will cash disappear from our lives? And who'll miss out when it does?
Every March, the New Zealand Red Cross sends out teams of street volunteers across the country. With their white buckets and red vests, they're instantly recognisable. The idea, says philanthropy director Jasmine Edwards, is to raise awareness for Red Cross’ work and hopefully get some donations in the process. “It’s part of our largest fundraising event of the year,” she says.
But, over the past five years, the amount the street appeal brings in has been trending down. Edwards describes a combination of contributing factors: COVID, the ongoing cost-of-living crisis and a lack of cash. “We’ve seen a pretty steady decline in people carrying cash, and that’s had a big impact on our street appeals,” she says. “It’s really affected what we’re able to raise.” That, in turn, affects how much aid work the Red Cross can do.
Edwards and the teams she co-ordinates have pivoted to other fundraising methods. They’ve trialled EFTPOS, tap-and-go donation machines and even QR codes. Each has downsides, says Edwards. EFTPOS isn’t quick, and QR codes often rely on the person taking a photo and remembering to donate later. “The tap-and-go machines are quicker because you just pop your card on, but they’re quite costly. You could never afford to have one of those at every site.”
So far, the cashless options haven’t worked as well as people reaching into their pockets and grabbing a couple of notes or a handful of coins to throw into the Red Cross buckets. However, those days, it seems, are over. In 2023, Stats NZ reported just 7% of transactions were made in cash. Everyone is using alternative methods to pay for goods and services these days, from EFTPOS and apps like Afterpay to swiping their phones and watches loaded with their credit cards.
Edwards wonders how long Red Cross has got until it needs to make more changes to its street appeals. “Our volunteers have amazing conversations with people on the street,” she says. “It’s a real moment of human connection. You can’t quite replicate that with online donations.”
Cash is king – until it’s not
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Cash use is declining – rapidly. In its 2023 Cash Use Survey, the Reserve Bank of New Zealand found cash usage for everyday purchases had decreased from 95.8% in 2019 to 60.4% in 2021 and just 57.2% in 2023. The bank says 15% of New Zealanders prefer to use cash for everyday payments, but only 8% are regular or daily cash users.
Despite this decline, cash remains important, according to the Reserve Bank: it all depends on the situation. “Research establishes that New Zealanders place a high value on having access to cash,” a spokesperson told Consumer NZ. They cited short-lived personal emergencies, long-term complex personal challenges, community-level emergencies and digital payment outages as reasons for cash’s importance.
In December 2024, the Australian government announced it would mandate businesses selling essential goods and services in that country to accept cash from 2026. “For many Australians, cash is more than a payment method, it’s a lifeline,” officials said. Australians support this, with a survey by Australia’s consumer watchdog Choice showing 97% of respondents think stores shouldn’t be able to turn down cash for essentials.
But that’s not the case in New Zealand, where there are no rules to protect cash. If a business doesn’t want to accept cash, it just has to put up a sign saying so. The only rules limit how much a consumer can pay in coins. “The Reserve Bank is currently considering further changes to the law to support the cash system and ensure New Zealanders can access and use cash as desired,” the Reserve Bank spokesperson said.
How cash can help you spend less
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Tom Hartmann, the personal finance lead at New Zealand’s independent money guide Sorted, says cash can be used as an important tool for some people to make better budgetary choices. He says credit cards or apps like Afterpay removes a buffer and encourage consumers to spend more. “You go up to the till; you get what you want; you pay, wave, swipe, whatever you do ...,” he says. “It’s all pleasure because you’re getting the thing, and any pain is sort of reserved for the future, when you get the bill.”
Cash, he says, helps those who may be struggling with their budgets get their spending under control. “With cash, it’s a different experience. You’re holding cash in one hand, and you receive the goods in the other. So, your brain is processing the trade-off right in that moment – is this worth the pain of letting go of this cash for what I’m getting?”
Carrying cash, he admits, is becoming an antiquated notion. It depends on your personality. When he’s got cash, he’s more likely to spend it faster. But Hartmann recalls a conversation he recently had with his 17-year-old son, who has an entirely different attitude. “He sold something on Trade Me recently, and he wanted to be paid in cash, because he holds on to [cash] better,” Hartmann says.
How small businesses are coping
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Every Sunday, Carol Gunn opens the Grey Lynn community centre early to let in stall-holders. By 8am, the markets are humming with customers grabbing freshly-baked pastries, recently picked vegetables, hot drinks, cheese, eggs and more. Gunn has noticed more stall-holders offering EFTPOS and credit card facilities, and fewer customers taking cash.
But she also recognises the issues, saying operating EFTPOS machines can be pricey for stall-holders, especially when they’re just getting going. “At this time of the year, we get lots of NCEA students trying out business ideas as part of their course assessments – they can only use cash,” she says. “We get community fundraisers who can only use cash. Getting rid of cash could disenfranchise the grass-roots activities in society.”
Frank Argent, the owner of Barefoot Gardens, a small produce farm in Kumeu, Auckland, agreed. While bagging up my potatoes and chillis recently, he told me about 40% of his customers paid in cash, which he encouraged. Why? “Every time you swipe your card, the bank takes a sizable chunk,” he said. “For a small business like ours, it adds up to a reasonable amount over a week.”
Other factors to consider in the death of cash
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There are still many elderly people who cannot use, or forget how to use, tech. Cash, therefore, remains very important to them for everyday items like groceries. “A cashless society makes things very difficult for older [generations],” one financial advisor told me.
Natural disasters or emergencies can affect internet networks, shutting down EFTPOS and credit capabilities. “Cash is often the only option at that time,” an advisor said. “Everyone should have a small amount of cash put aside.” How much is a personal decision, but the National Emergency Management Agency suggests it’s logical to have enough for three days’ worth of food and petrol. It also says small denominations, like $5 notes, are useful because some businesses may not be able to offer change.
Putting coins into a piggy bank is often a child’s first interaction with money. An advisor said the process can teach children important financial basics about saving money from an early age.
The king is dead; long live the king!
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Claire Matthews, an associate professor at Massey University’s business school, says it’s too soon to say we’re on the brink of becoming a cashless society. “We have already moved a long way towards it, but I think cash transactions will be difficult to eliminate,” she says. “I think probably most of us are ready to move to a cashless society. But there are a few who aren’t and will likely find it very hard.”
But my own experiences suggest the shift could be happening faster than anyone thinks. While researching this piece, I found a sign at my local Pak’nSave declaring the store’s self-service check-outs would soon stop accepting cash. “Cashless,” warned a printed sign in red.
Then, at a recent Auckland Football Club match, I approached a cashier while balancing drinks and hot chips. When I handed her a $50 note, she turned it away, saying, presciently, “We don’t accept cash here”. I smiled and waved my phone over the terminal. That $50 will have to wait for another day.
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