By Jenée Tibshraeny
There are growing cohorts of New Zealanders either locked out of the housing market, or choosing to steer clear of property in fear of the Auckland housing bubble bursting.
The home ownership rate has fallen to 63% from 73% over the last 25 years.
ASB’s most recent quarterly Investor Confidence Report (unsurprisingly) shows property owners largely see their homes or rental properties as their most profitable investments.
Yet only 6% of those surveyed believe shares deliver the greatest returns, while 11% say these come from managed investments and 13% from term deposits.
With interest rates historically low, people aren’t getting much for putting their money in the bank, yet they’re nervous about investing elsewhere.
So we talked to Authorised Financial Adviser, Martin Hawes, about what those in ‘Generation Rent’ should be doing with their money.
To begin with he says: “You can have a good life without owning your own home… If we look around the world, there are lots of people in lots of countries who don’t demand home ownership.”
Being a renter with a homeowner’s mentality
Yet he says the real trick is for renters to save any cash they may otherwise have put towards home ownership.
Renting requires less cash. While you can’t make a capital gain, you don’t have to fork out for a mortgage or rates and your insurance costs are lower.
“The trouble is that young people get a message that says, ‘This is the cost of my home – I’m renting – and I can spend everything else’. Well they can’t. If they want to keep in the same financial position as a homeowner, they have to make sure they save that difference between ownership and renting,” Hawes says.
“When you do long-term numbers between home ownership and renting, there’s not too much difference between them. We’re having a boom, so that will skew the figures between the two, but from a strict financial point of view, home ownership is probably not that much better than renting and saving the difference.
“The really good thing about home ownership though, is the discipline that is imposed on you by the bank for the mortgage. Because banks get really grumpy if you don’t meet your mortgage repayment schedule, whereas nobody gets grumpy if you don’t save that difference between renting and home ownership costs.”
Hawes bearish on the sharemarket
Hawes is bearish on the sharemarket, noting the headwinds coming from instability in the South China Sea, the Brexit, the Auckland housing market and New Zealand’s reliance on dairy as our main export.
He has cut back the portion of his personal portfolio made up of shares and property funds, from 50% to 40%, and has advised his clients to follow suit.
“I see a lot of risks out there, the least of which is Donald Trump,” he says.
“It’s a bit of a sell down. It’s not a wholesale exit.
“Back in 2008, before the GFC, I got really concerned and we sold everything. We sold every share and every property trust that we had. I’m not doing that at the moment.
“You can actually make a very good case for shares at the moment… Whatever you position you take, you should be able to make the case of the other side. So I’ve got a little bit bearish, but I can make the bulls’ case.
“And the bulls’ case for shares, is that the equity risk premium [the difference between what you’d get for a close to risk-free investment like a government bond and shares] is about right. Because interest rates are so low, they’re likely to stay lower for longer than anybody ever thought. And therefore shares, with their superior and greater dividends, deserve perhaps to be up there, and that might be sustainable in the long-term.
“Now I’m worried about a lot of other events that might befall us and therefore I’ve lowered risk.
“By some historic valuation method – particularly the price-to-earnings ratio – shares look very expensive, but not when you look at the equity risk premium.
“My advice to that young person who’s saying, ‘I’m not going to buy a house. They’re too expensive, it’s all ridiculous, but I’ve got $75,000 saved’; my advice to that person would be to make sure they save enough, because the savings rate almost always beats the investment rate. The amount that you can put aside is almost always more important than the rate of return that you will get on it.”
Hawes adds: “You can’t beat some diversification… because we never know what economic or political event might happen and the different asset classes – shares, property, bonds and cash – perform differently depending on what happens.”
‘Time to keep yourself firmly grounded’
Asked whether the New Zealand stock exchange in particular is overvalued, with returns of 23% over the past year, Hawes says:
“Again that equity risk premium appears to be about right. On a price-to-earnings ratio basis, it does look very expensive… They [NZX shares] are sustainable at that level.
“My problem is that New Zealand’s got some vulnerabilities at the moment. We’re based on construction, we’re based on immigration, and we’re based on tourism. Those three things are the big players in our economy at the moment and each of them is quite brittle. Each of them could slow down or stop at some point.
“Construction’s the least likely, but if immigration slowed, then construction would slow. Tourism is always quite a fickle industry.”
Hawes recognises Economic Development Minister Steven Joyce made a good argument around the strength of New Zealand’s economy on TVNZ’s Q + A programme over the weekend.
Yet he remains cautious: “I think it’s just a time to keep yourself firmly grounded I guess.”
P2P to reveal the value banks add as the middlemen between savers and borrowers
Hawes doesn’t have a firm stance on the sustainability of peer-to-peer lenders.
The likes of Harmoney and Squirrel Money have provided investors with decent returns since entering the New Zealand market, yet cracks are beginning to show in Harmoney’s business model.
It is expected to plead guilty to charges laid by the Commerce Commission, alleging it misled consumers. The six-figure fine expected to be imposed on the P2P lender will hit hard, given it suffered a $14m loss in the year to March.
Hawes says he has a small investment with Harmoney, which seems to have “worked pretty well”.
Yet he has his hesitations: “I’m always a bit concerned when I run my eye down the list of people wanting to borrow money, because it says what they want to borrow it for, and it’s house repairs and it’s holidays and it’s stuff I wouldn’t be borrowing to buy.
“What is happening with P2P is that you are taking the bank out of the middle… It takes money from depositors and it lends money out to borrowers. In sitting in the middle, it [the bank] makes a very good assessment of the borrower’s capacity to repay.
“With P2P you’re sort of making that assessment yourself, or Harmoney’s doing some of it, but you’re looking at it and you’re thinking, ‘I don’t even know this person. I don’t know the person’s age, I don’t know much about the person’s financial capacity, or their income…’
“Whereas certainly for bigger amounts of money, the bank will actually sit down with somebody and make the assessment on the basis of the person’s character, the person’s collateral or security and the person’s cash flow.”
Hawes concludes: “It will be very interesting to look back in 20 odd years to see if the banks are really adding value by sitting in the middle between people who want to deposit money and people who want to borrow money.”
KiwiSaver shouldn’t be used for general savings
Despite KiwiSaver funds performing well, Hawes says it generally isn’t a good idea to invest any extra cash in KiwiSaver, as it isn’t liquid.
The money is basically locked up until you’re 65, unless you’d like to buy your first home or suffer serious illness or financial hardship.
Hawes admits that making additional KiwiSaver contributions may work for those lacking in discipline, who might be tempted to blow money they put in a bank account or some other type of investment.
“But I think those people are few and far between.
“I think people shouldn’t use KiwiSaver for general savings.”