Renting vs Buying - and why higher interest rates anyway?

I saw a post on Stephen Judd's blog about the merits of renting a house versus buying.

Like Stephen, I’m renting. We used to own several houses in the Kapiti area, but sold those in late 2003 / early 2004 after Bush invaded Iraq.

"Eh?" You say?

We wanted to concentrate our equity and reduce our proportion of debt. It looked to me like the US was about to repeat the “guns & butter” cycle of the late 60s – early 70s. Then, the USA’s huge war and social spending deficits lead to a falling US dollar, inflation and higher interest rates. The declining value of the US dollar lead to oil price hikes as the Arabs sought to compensate themselves for the decline in value of the currency their oil was valued in - the US dollar.

Sound familiar? It should. Except instead of driving up the deficit with social spending, Bush cut taxes.....same difference.

With this prospect on the horizon at some stage (wasn't sure when), I didn’t want to get caught over-leveraged, carrying too much debt and having too little equity. I was happy to float on the bubble and had the rough working sense that when (or if) interest rates hit 9% it would be close to the peak and time to bail out before the rush.

As 2003 turned into 2004, 5, 6 and 7, the US deficit exploded, oil prices crept ever upward and mortgage interest rates topped 9% in NZ, thanks, in part to the US Federal Reserve (their central bank) lifting its prime rate for 11 straight quarters. Central banks around the world followed on. These rate rises effectively triggered the "sub-prime" credit crisis which had been waiting like a land mine to be stepped on. I didn't foresee that other than to wonder broadly how much longer people could afford higher interest rates.

By early 2007, the time seemed about right to sell up and secure the capital gain from what was increasingly seen as a housing "bubble". We put that one property (a farm) on the market in early November, a bit later than I would have liked, but thinking fine weather would hep it sell.

The housing market was well ripe by then and other factors were starting to creep in. Luckily, the land we were selling was a rare thing in the area and we did sell it to a dairy farmer – after several nail-biting months – for what we wanted. That was almost double what we had paid for it only 4 years before. Close one….but the timing proved to be just right. All the offers we got were in the right price range so it was a matter who came through first with the cash.

We’re now renting in Auckland, earning interest instead of paying it…and it more than covers our rent, if we cared to spend it. We don’t.

I calculated recently if we saved instead of buying, even allowing for very modest capital appreciation, we would be at least $100,000 better off, and probably more, in 5 years time if we did NOT buy a house.

So we have not.

My question is: Why does the Reserve Bank - in effect - transfer “excess liquidity” to privately owned, commercial banks through higher interest rates? People who used ot be on 6% or 7% mortgages now have a much larger share of their disposable incomes transferred directly to banks. It's like a tax with no benefit.

If I'm not allowed to have my own money, I’d much rather pay that money in tax for schools, hospitals and roads than to banks and their shareholders who aren't accountable to me in any way.

I understand all the economic concepts around interest and inflation and credit.....It just seems odd to me that if money needs soaking up that it should go to (mainly) private beneficiaries like commercial banks, leaving some people struggling to eat and pay for petrol to get to work. Maybe some new mechanism for adjusting monetary liquidity needs to be created.

That's my comment. Now you can go back to Stephen's blog if that is where you came from