Month: April 2013

Never trust your brain to make the best financial decisions

So I had a bit of an epiphany today, which I’m sure I’m had before over the same topic, but this time it really sank in.

It happened while I was reading this interesting post about your subconscious brain, and how investing decisions, for most people, are made to secure their social status rather than for good financial reasons – I don’t think you invest the way you think you invest.

For the past year I have been somewhat obsessed with planning on buying a house. Last year we simply didn’t have enough for the deposit which fortunately stopped us from buying a very beautiful but far too expensive house. This year we’re in the middle of a rental contract until 2014, so again it is stopping me from rushing in. I’ve been struggling to understand why I’ve been so interested in doing so, when the previous year I couldn’t care less, and actually preferred the freedom of not having a house. Now I’ve realised the problem – everyone around me owns one or more houses, the general consensus is owning a house is “the best investment eva!11!”, and renting is a dead-end road to nowheresville.  One colleague in particular has been a big source of my subconsciousness monkey going bananas (hehehe) – “Oh you should rather get a house now, than save up for a deposit.  There’s no way you can catch up with savings the way the market is rising every year.  Better to get what you can now.”  “Oh yes, I’m buying a house for my son [What??], but the auctions are completely crazy.  It’s really difficult to find a house at a decent price nowadays.  The Asian investors are really pumping the prices up.”  “Why waste money on rent when you could be paying towards a house”

So a bit of context into why buying a house would not be in our best interests here in New Zealand :

  1. Housing prices are crazy at the moment, like “Just before it hit the fan in the US” crazy.  As in “house prices can never go down!”, and “Get into the market before you lose out, otherwise you’ll never be able to afford it!” crazy.  Housing is so unaffordable the government is starting to think about taking steps to cool it down somewhat.  Our country’s personal debt is getting staggering, even if the government’s debt is fairly decent at the moment.
  2. There is also a bit of a housing shortage in Auckland at the moment, so the good houses are not only expensive but also get snapped up really quickly*
  3. It all tastes a bit like a bubble’s in the air about to burst. Banks are competing against each other to offer the lowest mortgage rate, and the lowest deposit required.  100% mortgages aren’t that difficult to acquire.
  4. Mortgage rates aren’t that great anyway – with good credit you can get 4.99% for a 2 year fixed loan if you have a big enough deposit.  5.7% to 6% for a floating term is more common.  In the US, I know you can get much longer fixed term periods for a lot lower interest rate.
  5. Rent isn’t too bad at the moment.  It’s crazy compared to other countries, but compared to housing prices, and it hasn’t risen too much.**
  6. We’re not sure what our future holds. We may stay in New Zealand for a few years to get our permanent residency, and then move on to Australia for a few years.  Or we may take a stab in Europe, or maybe even a low-living-cost but politically stable 3rd world country.  Or we may want to move to the South Island where living is easy and the winters are freezing 🙂  My husband is thinking about changing career track since he’s feeling bored and frustrated at work.  Buying a house would at worst be dangerous, at best a huge ball-and-chains keeping us in a city we might not want to stay in for very long.

I’ve been justifying that I want a house, thinking that it will give me the stability I crave, or some sense of belonging.  Or I feel that with a house, I’d finally get around to doing some gardening and start a veggy patch.  But to be honest, I haven’t had the willpower to do so now, I’m not going to start when I’m in my own house.  I’m really hating “wasting” money on rent, but I was happy before to pay for the housing “service” without the hassle.  And that financial stability we’re currently enjoying, may go down the tubes if the mortgage rates skyrocket and house prices plummet.  Buying at the top of the market will make me a very unhappy little camper.  Watching prices go up even more…. well I’d probably just shake my head and continue plugging my money into the stock market.

So every time that inner subconscious boss wants me to look at houses again, or badgers me to calculate yet again how much “better” it would be to own a house, I’m going to stick to the reasons above for why it’s not such a good idea for us to buy into the housing market at this point in time.  It really is school all over again, and once again I *don’t* have the latest Docs that my friends are all wearing, and everything within me wants to fix that so I’m with the “in crowd” again.  Thanks subconscious brain!

* As an example of the crazy market, we went to an open home at a 2 bedroom unit today – it’s been nicely renovated and newly painted, but it’s in a complex of really dumpy units.  And the occupants seemed loud and not very happy, and had a faint air of desperation around them.  Trash littered the lawn, along with occupants’ discarded and rusting junk.  The estate agent said they already have an offer for $225, 000 from the previous day!  Someone wanted it badly enough, to pay that sort of money.  And this is not in the best suburb, not the worst, but definitely not great and a busy 30 minute drive from the CBD.

**  We’re paying $415 a week for a large 3 bedroom house in a nice neighbourhood (not the super fancy expensive suburbs, but average), that has an estimated value of $390, 000 (CV value), but in this market would probably go for up to $450, 000.  That makes a Price-to-rent ratio of 21, putting it into a “much better to rent than buy” .