Home Ownership vs the Stock Market: Who Wins?

Home or stocks? Going head-to-head

Rory: Hello, and welcome back to another episode of the Blueprint Finance Podcast, where we help Kiwis make smarter decisions about their finances. I'm Rory McSweeney, Senior Insurance Adviser and your host, joined by Daniel Lipman, Senior Mortgage Adviser and co-host. Dan, we've got a hot topic today, and we'll be going head-to-head on this one — owning a home versus investing in the S&P 500, or similar.

Daniel: This one's been on the list, and I've been reluctant to do it — part of the reason I didn't do the intro. I'm actually not too hot on it, because I'm die-hard property. Owning your family home is a major cornerstone of building wealth — and you're just here to shoot holes in that and undermine me.

Rory: A little bit. There are two parts to this conversation: the numbers, which we'll get into, and the more subjective elements around lifestyle and how you want to live your life. Financial and non-financial decisions. It's also a really good case study on the science and psychology of investing, which I'll touch on at the end. But we'll mainly focus on the numbers. I'm super excited about this — I love this conversation, and we've got a really good case study that perfectly summarises the cost-benefit and the opportunity cost of each option.

Meet Jack & Jill

Rory: Do you want to lay it out for the listeners — what's the study?

Daniel: Whenever we do a case study on the poddy, we give all the stats of the person — and I love that you set up the initial part with a sprinkle of Rory flair. Our couple is in their 30s, and they came from Dunedin to the big smoke, Auckland.

Rory: I spent seven years in Dunedin — I love the place, and it's not all about Auckland. We help people all across the country; they just happen to be in Auckland for this example. And we've done all the numbers so you, the viewer, don't have to — we've made all the assumptions and kept it really straightforward.

Daniel: So let's go through the assumptions. We're comparing renting and investing in the stock market against owning your own home. First assumption: our couple, Jack and Jill from Dunedin, have $200,000 in KiwiSaver collectively — maybe $100k each. That's a serious nest egg for a 30-year-old couple; they've done well. They're looking to buy their first home, or continue to rent, and they've come to us to analyse the options.

The assumptions

Daniel: The purchase price is a million bucks — the average Auckland property price. They've got a 20% deposit, so they're getting the very best rates. That's an $800,000 mortgage. We'll put the mortgage rate at 5% — a fair average fixed rate — and assume annual property growth of 5%, in line with the last 10 years and the historical average. We'll pay the mortgage off over 30 years, no additional payments. They're also on a $200,000 household income.

Rory: So the nuts and bolts: they can buy their first home — take out an $800,000 debt and sell their souls to the bank — or turn that KiwiSaver into a high-growth fund and start an investment journey. They're 30, so we'll map out the next 35 years.

Daniel: Touching on the investment fund — we keep it as KiwiSaver, so they can't access the money, but they keep contributing. To make it fair: as soon as they buy the property, there's a gap between the cost of owning and the cost of renting, because a mortgage holder also pays rates, insurance and maintenance. We've assumed $4,000 rates, $3,000 insurance, and $100 a month maintenance — and those costs, excluding maintenance, rise 3% a year with inflation.

Rory: Rent is $700 a week, so there's about a $440-a-week difference between owning and renting. That difference is the money we project investing.

Daniel: And we've mapped it so that over time the difference diminishes, and at about 20 years it flips — it becomes cheaper to own.

Rory: Why is that?

Daniel: Because rent increases about 3% a year. It's nice to say renting's cheaper now, but when you buy, you stabilise your property costs — you neutralise your future living costs. Rent going up 3% is a bigger dollar increase than 3% on smaller costs like rates or insurance.

Rory: And we've assumed the S&P net return is 10%.

Daniel: Which is generous — but if we're assuming 5% for property, 10% for the S&P is fair. It's all relative. And if you want to run this with more conservative numbers, be our guest.

Scenario 1: Rent and invest

Rory: Can I start with the first scenario? This is wild. $200,000 — if you crank that KiwiSaver into a high-growth fund, your Milford Aggressive or similar, doing 10%, in 35 years that $200k is worth about $6.6 million.

Daniel: Almost spilled my cuppa. That's crazy — people can't comprehend how crazy that is. We've managed KiwiSavers via Jono and seen some big balances, but folks in their 30s now with six-figure balances — what they're actually going to retire on is wild. And this isn't even factoring in contributions — no income growth, no 4% employee or 3% employer contributions. That's just leaving the $200k.

Rory: Then the investments — the rent-versus-owning difference — come to about $3.3 million by age 65. So if you rent your whole life and invest the difference, come 65, not including KiwiSaver contributions (we assume those are the same on both sides), you're left with $9.6 million.

Daniel: That can't be right. After 35 years?

Rory: $9.6 million. I'll be precise — I retract my earlier $9.9; it's $9.6 million. But that's a hell of a lot of coin, and it gives you options in retirement.

Daniel: So many options.

Rory: The key things to note: initial investment $200,000; in year one you're putting in about $449 a week. That slowly diminishes as your rent rises and you can afford less, until year 20 when you're putting in $0 — and then it swings the other way, where the homeowner actually has more cash flow.

Scenario 2: Buy and hold the family home

Daniel: For the home buyer, you're paying about $449 more a week to own, but you've neutralised your living cost. What benefits do you get? You get a place to call your own — and you start reaping the benefits of home ownership. Yes, it's more expensive initially, but you've got proven appreciation: a 5% annual return, but it's a leveraged return — you only put down $200,000, yet the whole property grows. And every payment builds equity. Why pay off someone else's mortgage when you can pay off your own?

Rory: Finally, someone talking sense.

Daniel: So time goes on, and 30 years down the track we've paid off our mortgage. From year 30, you can take the full mortgage payment — plus the amount you used to cover the rent gap — and invest it for the last five years. So at 65, what's the house worth and how much cash have I got? My house is worth $5.52 million, freehold — the same million-dollar house, 35 years on — and I've got an investment account of $940,000.

Rory: And you've only spent $100 a month on maintenance, 35 years later — you're obviously doing a lot yourself.

Daniel: Big DIY. $1,200 a year — save that up, that's a whole roof.

Rory: So a $5.5 million property and $940,000 in cash — about $6.46 million. Again, excluding KiwiSaver, so you have more. But I've got $9.6 million in cash. That's $3.14 million in my favour — and that's you just buying and holding your first ever property.

Daniel: In real terms, though, that doesn't happen.

Round one to the investor

Daniel: The numbers did sting, and I appreciate the opening. You're completely right — home ownership, paying the minimum on your mortgage, doing the bare minimum, doesn't make sense compared to fundamentally investing in the stock market at 10%. You'll end up financially better off renting. But if you approach home ownership with some intent, you can end up far, far better off, because you can use that leverage to buy more property — and leverage is like a time machine. So I'll leave it there and say: you've won round one. Shake my hand.

Rory: I do have a few thoughts. We started with that $200k in KiwiSaver, tucked away in the fortress — which is good, because investing can be an emotional rollercoaster. With a portfolio in the millions, a 20 or 30% swing takes a toll. Home ownership is a smoother ride. And there are lifestyle factors — lifestyle's subjective; some people love renting and the freedom to move, not being tied down.

Daniel: Although, you've been in the house for 35 years — I'd hope you've put in a new kitchen, done something to it, or else you're living in a shack.

The psychology of investing

Daniel: We should touch on the psychology before the final scenario. You probably need a higher maintenance figure — to replace a roof after 35 years you'd want more like $200 to $300 a month, which would actually widen the gap you can invest. But there's the psychology of investing. People pay rent like it's religion, and they pay their mortgage like it's religion — less than 4% of mortgages are in arrears. Whereas less than 10% of Kiwis invest regularly into investment accounts. This model expects people to invest a really decent amount, like religion, in good times and in bad.

Rory: And especially in bad — buying the dip is the most important time to invest, when you're getting everything at a discount. That's what gives you the average 10% return. Jono said it on his episode: if you miss the 10 best days in the market, your returns get significantly impacted.

Daniel: Whereas property locks in that gain — you just have to make your mortgage. If you run into hardship and have to cut back the investing, it completely destroys the model.

Rory: It doesn't mean it's not possible — I tip my hat, it is possible. And to that point: if the investor lost discipline, dipped into their investments, didn't do it for a while, or just lived a more lavish lifestyle, they'd still have $6.6 million from that $200,000 KiwiSaver — the fortress. So there's a lesson about discipline, and KiwiSaver does it for you. It says a lot that in Australia you can't access your super for your first home — they mandated that into law, because the calculations suggested people are far better off long term.

Daniel: For the layman, they probably will be. But the proactive homeowner — our clients — will outpace that regardless. And that's my secret sauce, which I'm about to share.

Scenario 3: Tapping equity for three rentals

Rory: Here comes the Uno reverse card. What happens if, at year 15, we dip our toes into property investing?

Daniel: This is what I live for. The most exciting thing about property ownership is that you can actually use your equity. We talk about your invested money like soldiers going to work for you — your equity is exactly the same thing. You can access those dollars and redeploy them in the property market, with tools like interest-only. So let's revisit our property owner. For 15 years you, the investor, have been building wealth like clockwork, while I've sat back paying my mortgage and painting a few rooms. Now I've gone to see the boys at Blueprint, and I'm equity up to my eyeballs. At year 15 the family home is worth $2.08 million — it's doubled. The mortgage balance is $540,000, so I've paid off about $260k. That's total equity of $1.54 million — and I can borrow up to 80% of my home, so usable equity of $1.12 million. My income's risen with inflation, so I've got servicing. Jack Hammond tells me to target high-yielding, cash-flow properties — 60 cents on the dollar — and I can comfortably buy three.

Rory: Within your means.

Daniel: Our advice — and this isn't tax advice, but after dealing with hundreds of investors — is that the family home stays on principal and interest, and all the investment debt is interest-only. We're not paying down the principal on the three rentals; we're speculating for long-term capital growth, holding for 20 years and selling on retirement. Say they're cash-flow neutral, with a $300-a-month total top-up, which we deduct from the investment account and let grow. We start with a total property value of $1.8 million — three properties worth $600k each. 35 years later, at 5% annual growth, they're worth $4.77 million.

Rory: And that's achievable — you're advising people on this all the time.

Daniel: All the time. It takes a bit of psychology too — some people just want to pay their mortgage off and not have their money work for them. But this is completely achievable: plenty of equity, buy three rentals interest-only, get the capital gain.

Rory: So what's the retirement number?

Daniel: $9.79 million net worth. That's why I couldn't say $9.9 earlier — I've outstripped you by about $190,000.

Neck and neck — pick a strategy

Rory: Different ways to get to the same outcome. And you could lean into each more — if I'm investing, maybe take more risk; or you could buy more investment properties. With that equity you could've bought nine rentals instead of three. You really had to clutch at straws there in round two.

Daniel: I'd like to land on the key points. Yes, the property numbers look better — but I just don't trust the psychology of the every-man to invest like clockwork for 30 years. I trust people to make their mortgage and build equity, then have options with that equity. So I'm backing the family home all the way — and you don't have to pay it off in 30 years; you should find ways to pay it off faster.

Rory: I hear you, but I disagree, mate. Fair call. In hindsight, we should've run the version where people top up to a 10% KiwiSaver contribution — leaning into the fact that people aren't disciplined, so you drop it in the KiwiSaver vault where you can't touch it. If you could get to 65 with anywhere near $10 million in cash, the lifestyle you could have... It's not for everybody — some people want to settle down and have roots — but you could live six months in Croatia, six months in Bali, here, there and everywhere, never fixed to an abode.

Daniel: And that opens up a great conversation — wealth building is a science, because it's a blend of logic and personal preference. Some people love an asset that appreciates, that they don't mind maintaining, that they can tap for equity — the family home. Others prefer a more nomadic approach, moving every couple of years. The beauty of modern finance is there's a solution for both — even the renter can buy an investment property.

Rory: Reinvesting is really interesting — lots of our clients do it, especially buying an investment property while living with parents. Where it gets interesting is the young professional couple in a million-dollar home whose next stage is a family — they outgrow the two-bedroom in Central Auckland and need more equity to move up, whereas a renter might face fewer barriers moving to a new rental, even if it costs more per week.

Daniel: This case study really got me thinking. Home ownership is in our Kiwi DNA, but some people are doing it differently — reinvesting, or just investing and renting. Different strokes for different folks.

Rory: And it's a good reflection of the opportunity in diversification. I'm a massive share investor and I thrash my KiwiSaver, even though I've got multiple properties, because I see the benefits either way. Property's been stagnant for five years while the S&P and international markets have hit all-time highs — so it's a blend. When you're starting out and saving that first deposit, you've got to concentrate; you can't be investing as well. But once you're set up, you can do a bit of both.

Daniel: Two scenarios, almost neck and neck, both great outcomes — it comes down to personal preference. What it tells us: first, the importance of owning assets — over time, you must own something to build and keep wealth. And second, diversify if you can, and pick a strategy and stick to it. Do something — don't do nothing.

Rory: Exactly. Thanks, mate.