Shamubeel Eaqub receives “quite a bit” of hate mail for his views on home ownership. Sometimes, people try to give him a piece of their mind in person.
“Jessica” – he gestures to the reception of the New Zealand Institute of Economic Research, where he is principal economist – “usually stops them at the door. People get very emotional about these things.”
Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research Photo: Supplied
Eaqub, 33, is not against home ownership in principle. But he wants people to know the true cost of their purchase before they sink hundreds of thousands of dollars into property.
“You can look at lots of metrics – relative to incomes, relative to rent, all those kinds of things. The fact is, house prices in New Zealand are incredibly expensive,” he says. “And the evidence over the last thousand years is that when prices go up, prices come down.
“The future is uncertain. … If prices fall, will you still be better off?”
New Zealand has a culture of prioritising home ownership, he says, so renting is seen as a second-rate alternative, even in cases where it makes more financial sense.
“The accepted wisdom perpetuated by our parents is that if you buy a house, it’s a good investment, and sinking your money into rent is just giving money to somebody else, but that’s a common misconception. There are a lot of reasons why you should own, and a lot of reasons why you shouldn’t.”
The best reasons to own a house, according to Eaqub, have nothing to do with money: “Because they want a place of their own, they want to be close to the school zones, they don’t want the potential upheaval of having to move… all of those are very good reasons.”
The rental market here is “quite difficult and transitory”, says Eaqub, which makes it hard to settle down in a rented property. Plus, there aren’t the mechanisms in place to allow for long-term rentals in New Zealand as there are in other parts of the world, like much of Europe, where leases of upwards of 10 years are the norm.
If you want to buy a house, the first question you should ask yourself is why. “If it’s for non-financial reasons, don’t bother with the spreadsheet – just go out and do it,” says Eaqub. “And that’s fine, but just be really sure to plan for your retirement as well. A house is not necessarily a retirement plan. There are risks, and you should have a portfolio of investments.”
There’s a lot of dishonesty with ourselves when we think about these comparisons. ... Nobody listens to me, everybody goes and buys houses.
But too many people on the fence as to whether to buy are swayed by the fact that, at face value, a mortgage would be less than their rent when, in most cases, that’s not a like for like comparison.
“There’s quite a common misconception across a lot of people who think that because they can pay less mortgage by moving further out that it’s cheaper to buy a house, but that’s not really the right comparison,” he says. “You should be asking, ‘If I lived in this house, either as rented or owned, what’s the difference in costs?’”
He urges people to work out how much it would cost to own the house they currently rent, using the average house prices by suburb listed by the Real Estate Institute of New Zealand, and to compare those figures. (And, for those who decide to commit to renting, Eaqub suggests saving the difference between those two figures.)
The next step is to factor in interest and the cost of rates, insurance and maintenance. “People are very quick to look down on renting as a poor alternative to home ownership, but think about what you’re paying for with your rent,” he says. “All the services you’d get as a renter, you have to pay for as an owner.”
And with the national median house price exceeding $400,000 in October, having no good reasons to rent is not necessarily a good reason to buy – especially given that, after 25 years, a mortgage of that size will have incurred $355,000 in interest.
Eaqub points out that a house will be the biggest purchase a lot of people ever make in their lifetimes, and, for that reason, should be approached with caution.
“There are too few of us who sit down and think dispassionately about why we’re buying this house, and for what reasons, and what risks we’re willing to take,” he says. “Most people, when they think about housing, go with gut instinct, but if you think about it, it’s a massive investment. Why would you not do a proper analysis of it, and make sure you understand the risks and opportunities?”
Owning a house is also a big commitment, and could come to be a burden – especially if you’re at the start of your career.
“Whereas once people stayed in the same job, in the same region, for their whole life, that’s becoming less and less common,” he says. “Especially if you’re in your twenties and thirties, you’re more likely to move than you were ever before, and if you own a house, you become less mobile. There’s very good evidence that people who own houses don’t even look for jobs outside their region.”
You could rent out a house after you’ve bought it, but then you become a landlord – and that, Eaqub says, is work. Besides, a house in and of itself is not an investment, as investment properties tend to be in densely-populated areas with high rates of occupancy.
“Where you want to live as a home owner is not necessarily the same as where you want to have a rental property,” he says. “In Epsom, most people would own houses; in south Auckland, high rates of houses are rented out. You don’t want to own the one rental property in an entire suburb.”
If your plan is to buy an investment property to rent out, Eaqub suggests you treat it as a business.
“You should be really hard-nosed about what you’re buying because, even if you decide to live in it for a little while, it’s ultimately a business,” he says. “Think about the cash flows, the future risks, the future gains and falls in prices, and build it all in. It shouldn’t be just about mortgage payments.”
But, as long as New Zealand society continues to prioritise home ownership, the situation is unlikely to change. “People like to do things that are culturally acceptable – if the cultural norm is own to homes, people want to own homes,” says Eaqub. “There’s a lot of dishonesty with ourselves when we think about these comparisons. I’ve seen it with my own family. Nobody listens to me, everybody goes and buys houses. I’m out in the cold here.”
Eaqub and his wife rent in central Wellington. “It makes both financial sense and lifestyle sense,” he says. “The current place that we rent would have cost twice as much to own per month, so we save the difference. But also, we don’t know if we want to live in Wellington forever, and it’s good for us to have the flexibility to be able to move out.”
So when does he intend to buy his own home?
“Oh, it’s pretty simple,” he says. “When my wife tells me to.
“But she’s an economist as well, so we’re pretty much on the same page. Like I said, when we buy a house, it’s not going to be for financial reasons.”
Cover image by Flickr user michal_hadassah