Essay Sample on The Shift from Buying to Renting Homes: An Analysis of Factors in New Zealand

Shelter and housing are basic human needs. When most adults encounter the decision of either renting a house or purchasing it, the majority often choose the latter. However, this trend has shifted significantly over the last decade. Since New Zealand once witnessed the highest percentage of people who own homes in the whole world, they present an ideal case study for this paper (Hargreaves, 2002). At the beginning of the century, New Zealand had an all-time high of 73.7% of people who owned their own homes. Presently, the rates are projected to have dropped to about 60%. Based on this reported statistic, it is apparent that people are tending to lean more towards renting at the expense of purchases.

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In previous years, it was significantly easier to obtain property owing to the low valuation that was placed on houses. However, the recession has come along with several financial implications and has resulted in the rise of the costs of residential. This paper seeks to analyze the demographics, socio-economic impacts, as well as economic explanations for the recent trend towards renting.

From the analysis, the impact of insufficient wealth within households on the decision to rent is determined. However, it is essential to note that decisions on whether to opt for renting or purchasing a house do not just depend on financial status. Instead, several lifestyle determinants say otherwise. For instance, there are situations where the lifestyle determinants would push toward buying even though the financial circumstances favor renting (Hargreaves, 2002). In such cases, issues such as security of tenure, ownership pride, societal status, as well as one’s preference to tailor the building to fit personal tastes, play significant roles in the final choice.

Through this analysis and thought process presented above, this paper shall pit the options of buying versus renting and provide directions on how best to arrive at the preferred option.

Literature Review

The demand for housing is dependent on the income, the terms, and conditions involved in the finances, the rate at which the population is growing, the age demographics, clients’ preferences, as well as the cost incurred in construction (Hargreaves, 2002). The income one receives a significant role in the choice of housing. This is because, with the increase in income, comes the increased housing demands. People with better incomes tend to be associated with the desire for better quality and luxury in life.

Concerning finances, this has dramatically been affected during modern times. With many countries suffering from economic inflation, the prices of commodities such as houses have significantly increased (Rodrigue, 2011). When these increments are compared to the consumers’ income, they are mostly disproportional. As such, finances contribute to the choice or preference of one towards housing.

While most people tend to rely on mortgages to secure homes, it is unfortunate that the majority of them do not understand the implications of the interests that are accrued on mortgage bonds. With increasing interest rates, the payments remitted every month to satisfy the terms and conditions of the mortgage bond equally increase. Ultimately, the money spent is way more than what would ordinarily be paid on regular purchases. Mortgages indirectly influence the tendencies of people leaning towards renting at the expense of buying homes. This is because, with the unfavorable terms and conditions of the mortgage bond, there is bound to be general distaste towards buying homes (Rodrigue, 2011). Consequently, the demand for rentals rises.

Population increase and different age distribution or patterns affect housing too. More people mean higher demand for housing. Higher demand for housing affects their prices as well. Concerning age distributions, students, for instance, typically harbor a preference for renting flats. In contrast, persons who are more mature and probably have families will lean towards purchasing houses or renting in areas that have more privacy than that which is provided by rentals.

There is no doubt that everyone harbors the thought of eventually owning a home as this bestows on them irrevocable rights on a particular piece of property. Further, such persons can control the situation of their homes as they have their independence, unlike in cases where the landlords have the final say (Rodrigue, 2011). The perception of security and wealth status when one eventually owns a home is a perception that has lived and been passed across several generations.

However, it is essential to acknowledge that circumstances in the new generation are not as they were in the past. Presently, other than the increased costs of housing, individuals are also struggling with the increased costs of food and life in general. At the expense of owning homes, the majority now desire to stay debt-free and use their income for survival. This shift in behavior and preferences has set the stage for rent. Thus, several houses are being constructed with the aim of renting, as compared to those being built for purchasing. This justifies the earlier assumption that housing decisions are not solely reliant on finances but, instead, on lifestyle considerations as well as the preferences one has in life.

The purchase or renting discourse comes down to socio-economic elements that are associated with independence, as well as interdependency. Interdependency arises when one’s decision on their social or economic lifestyles, not only impact them but others as well (Rodrigue, 2011). The situation of one’s family or household, the amount of disposable income available, etc. are just a few of the interdependency factors.

Housing has different sides. It could be used as consumption or investment goods. Consumption means that it is solely used as a source of shelter- a basic human need. As a form of investment, housing is used for renting (Rodrigue, 2011). An individual who wishes to own a home ought to weigh the advantages and costs of buying a home, vis-à-vis the option of renting. Should the former outweigh the latter, then he is most likely to go ahead. However, this balance varies from one person to another, with other factors such as their household considerations playing a role as well.

As established, some of the external triggers that push one towards renting include: 1) presently, leasing provides a cheaper alternative and as such, offer better value for money; 2) with the increased costs of living, one is bound to prioritize his day to day expenses rather than buy a home, which would most probably leave them in debt (Roth, 2007); 3) the age demographics have indicated the preference of young adults, who are the majority, to renting single person units; 4) there is a general change in attitude towards investment, as much, rather than personally own homes, majority of constructors are setting up houses and presenting them for renting- which has proven to be quite profitable; 5) modern times are witnessing smaller families, thus reduced house sizes that are equally more affordable- rentals provide this particular alternative in plenty; 6) presently, individuals’ attentions are drawn towards cars, healthy lifestyles, vacations, technology- unlike in the past where the obsession was with housing.

The key drivers or triggers for the rise in popularity of renting, particularly in the United States, are shifts in the labor market, as well as changes in society. Many corporates have opted to downsize their organizations, while others- owing to the increase in global competition, have decided to offer short-term contractual appointments to their employees. This is the general trajectory in the modern world and has affected quite a number of people. The job security that was well and adequately guaranteed in the past is no longer at play.

Data has shown the direct proportionality between the high rates of unemployment and increasing rates of renting. Previously, most people in New Zealand would hold the same job for several years, and as such, comfortably settled in one place. Presently, short-term contractual agreements cause people to keep moving around in search of greener pastures once the contracts elapse (Roth, 2007). It, therefore, makes sense to hold onto a house temporarily, since once the lease runs down, they are bound to be on the move. The more significant percentage of the population that has been observed to rent is within the age bracket of 20-34. Also, such individuals who fall between this age bracket are equally the same and are prone to such contractual agreements. This reality justifies renting at the expense of purchasing houses.

Previously, families and marriages were prioritized. The effort was made towards moving out to form new families. However, presently, circumstances, as well as priorities, have changed. Marriage is not perceived as necessary anymore. Equally, there is no such rush to have children until people are much older. Further, the trend is slowly moving towards single-person households, and the elderly opting to stay by themselves once their spouses pass on.

As established earlier, the three main variables in finance that push the rent versus purchase discourse include duration, appreciation of the prices of housing, and the interests that accrue owing to the mortgage bond. With regards to duration, it refers to the period within which comparisons between renting and buying are made (Roth, 2007). As such, when individuals are always on the move, the implications on costs are higher than those who are renting. In this regard, the most significant advantage of owning property comes due to the appreciation of land over given periods. Further, since the capital gains on property are not subject to taxation, the property proves to be a better investment.

Affordability tends to favor renting at the expense of ownership. Usually, when making a house purchase, a significant amount ought to be made in the name of the deposit. However, with regard to renting, one is only required to provide a deposit that is equivalent to the monthly rent.

Financially speaking, renting or purchasing a house is akin to making similar considerations with regard to vehicles or other commodities. They are best summarized as “hybrid capital budgeting decisions.” The purchase of an asset is reliant on whether its cost is lower than the rate charged through leasing. Thus, if renting a commodity by oneself is cheaper compared to renting from someone else, then it makes sense to invest in its purchase. This is the standard procedure or technique used in the assessment of purchase or rent decisions.

The option of leasing, and that of buying, when assessed independently, both result in negative cash flows. As such, the decision for the option that is best relies on that which has the least negative cash flow.

Further, geographical locations also play a role in rent or purchase decisions. Areas that show encouraging prospects concerning capital appreciation are generally ideal for purchasing houses. Also, areas that are prone to internal migration, resulting in population pressures tend to increase the valuation of housing. As such, making a purchase is bound to be more expensive when compared to the option of renting.

Summary and Conclusion

The last decade has experienced a significant shift towards renting houses at the expense of owning them. As witnessed, the triggers for this particular trend entail lower job security, reluctance to get into marriage and forming new families, and preference for single-parent households, as well as single-person households.

In the past, owning houses was preferred to renting, as the general affordability favored this preference, not only of houses but also of the standards of living.