New Zealanders - Investing and Buying a House

This post is directed at New Zealanders and permanent residents of New Zealand. You're bombarded daily with what amounts to rubbish about what you should do with your money. My advice, ignore them and do what you're already doing. Whatever it is it's likely to be better than the advice you're receiving, that's how bad most advice is.

But if wondering how to structure your thinking, then read on. I'm assuming you make all your decisions yourself and make all your investments directly where possible. You do this right? If not then you're likely to come up short of expectations as an entire industry in New Zealand is devoted to fleecing you and everyone else.

So let's get started. Consider the young family, two children of school age with one parent working fulltime on less than $50,000 a year. Can you get ahead and buy a house? The answer is yes and here's how:

1. Live within your income at all times. Do not borrow, never use the credit card. Do not take expensive holidays and if you do go on holiday make it the neighbouring beach town and its cheapest motel (not camping, that's expensive). Only buy real food and only eat just enough. Do not buy so much you throw stuff out. Use water to clean (warm water is the world's best solvent, proven so by Chemists), do not buy cleaning chemicals. If you garden, go to auction rooms and such and buy secondhand tools, secondhand furniture, use Trade Me to buy stuff others are throwing out (it's often quite good).

For clothing visit the thrift stores such as the Salvation Army. They often sell new clothing for $1 or $2 an item. How this works is tourists throw away items that won't fit in their suitcase, the 'Sallies' collect the clothing up and then distribute them around their stores. We're talking name brands here, but you have to be patient and visit the stores regularly. In electronics for that all-important laptop computer, look for ex-lease sales or get the latest cheap deal from Warehouse Stationery online. The latter deliver very promptly and can be much cheaper than in store. Never get carried away with electronics, do not buy Sky TV, better still buy a cheap DVD player and buy cheap DVD's in the bargain bins once a month. This is entertainment, and use Trade Me to buy a cheap TV. Another source of electronics, bicycles and stuff is the local Pawn shop. They're always looking to unload their unredeemed items.

A family which lives like this can exist and even save if they follow my advice. Own only one car and make sure it's a small Toyota or Subaru. They never break down.

Furthermore, live in a small regional town, get out of Auckland.

2. Kiwisaver, that's the compulsory retirement saving taken from your income each week, just pay the minimum. Have it paid into a conservative fund, or possibly a balanced growth fund if you're under 40. For older savers just stay conservative as you will be aware markets do melt down and you want to collect this money when you're 65.

3. Register and collect Working for Families. For a family as described above the sum you receive is about $9,000 each year. This is what you save. Remember you are living within your income - right?

Think about how you will receive this money. You have two choices, either take the money in advance weekly based on an estimate of what you will earn, or in a lump sum based on the year gone past. The second option is prudent as you know how much you'll be getting and it comes as a lump sum. With the weekly in advance approach you can end up owing the Inland Revenue money if you get it wrong.

4. Invest in Bonus Bonds. That's because Bonus Bonds do not impact your Working for Families entitlement. Just about everything else does; for instance any income from bank interest or dividends from companies reduce the amount your receive. Even sizeable gifts from family reduce Working for Families. But not Bonus Bonds. And you may win a large prize, and if you do you still receive Working for Families. Let this pool of money compound, that means have your prizes from Bonus Bonds be reinvested in more bonds, and then let prizes you win win more prizes.

5. Take a proportion of the $9,000 (suggest $5,000 Bonus Bonds, $4,000 shares) and invest in companies through the New Zealand and Australian stock exchanges. In doing this, look for companies that are solid but have been on the receiving end of bad news recently. The market disproportionately penalises bad news and then gets drunk on good news. These companies won't pay too much in dividends and thus you'll still maximise your Working for Families. Hold these investments for a long time and take any capital returns (that's where the company returns money to you over and above regular dividends) and invest that in more shares. Any company that is taken over, take the money and invest in more shares. Over time your investments grow and they can grow a lot.

The capital gain from the above activity is completely tax free in New Zealand. You bought these companies because they were cheap at the time and you bought to realise income from them over time. You did not speculate and trade in buying and selling shares.

[Example: Steel and Tube It is in trouble over mislabelling of its steel but its earnings are always satisfactory.]

Remember to own these shares directly in your own name. Do not invest in managed funds. Why? With funds you have no control over how they operate and they charge fees which soak up your potential returns.

6. Now you have the stake to buy a house. This came about because you lived within your income at all times, you did not spend unnecessarily, and you claimed what you were entitled to. Then when you did invest you did so largely tax free.

When you do buy a house, up and coming areas are always good, or run down areas of large cities that are gentrifying. For instance, Tauranga or Nelson not Wanganui or Blenheim (sorry Blenheim). In Auckland, think West Auckland; in Wellington think Newtown.

Keep doing 1 through 5 above but take any gains you make and pay off the mortgage. To this end a variable rate floating type of mortgage is best. If you do fix the mortgage rate make sure you can make capital repayments up to a certain sum without penalty. Paying off the mortgage quickly is the best thing you can do, it trumps everything else. A home with an income, such as a small flat attached to the house is also good if you can find such a property (your income rises and Working for Families reduces but you take the rent and pay off the mortgage sooner with higher repayments over a shorter time period).

As the equity in your first home increases, you're now in a position to buy a rental property. You can do this by putting both your own house and the rental acquisition together and borrowing against the combined value. Timed right you can borrow the whole price paid for the rental property you're buying.

Now you're on the path to being wealthy. Your income from employment may have risen with inflation but the wealth you've created was from wise investment and not chasing your tail.

Auckland House Prices

If you've been watching the news from the US you'd have noticed statements by Janet Yellen, Chair of the Federal Reserve. The US is heading into an inflationary cycle and Fed rates will be rising.

This impacts house prices in New Zealand. The NZ banks fund their lending by borrowing overseas. Currently the cost of that money is very low, with competing major economies offering deposit rates that are zero or close to zero. Therefore New Zealand is an attractive destination for that money looking for a safe haven.

But with US Fed rates rising, money will start heading to the US as the US Dollar is still the safe haven everyone prefers. That means NZ banks will be faced with the higher cost of obtaining funds, and they'll pass that on to the NZ borrower.

It is prudent therefore to avoid debt over the next few years, at least until the impact of Trump policies is fully understood. Home owners could look at fixing their home loan rates, say, for five years if the mortgage is a large one. Reduce credit card debt.

If buying a house right now, maybe look to keep saving, deferring the decision to buy. As rates rise houses will come on the market that are being sold by owners heavily indebted and unable to afford repayments. Yes, house prices could even fall in this scenario. Prices are already plateauing in most of the country and small interest rate rises have already been announced by banks. Expect this trend to continue.

New Zealand Investors

I've been thinking long and hard about the Auckland house price inflation. The banks have a role to play, they're willing to lend on real estate almost exclusively. But the way the New Zealand investment landscape is structured also has a major part to play.

Broadly speaking a New Zealand investor has three options:-

1. Buy investment real estate,
2. Start or buy a business, and;
3. Invest in shares, bonds, bank deposits or government stock - passive investment in other words.

Before any of the three are implemented, paying off debt must be a priority. Assuming that is achieved (at least substantially), and the investor maintains a sensible retirement superannuation account, then the three options present themselves this way:-

1. The investor buys houses or residential flats and apartments. The ideal is to invest in industrial and possibly commercial real estate, but the reality is residential purchases are easy to achieve. It's easier for a small investor to get their foot in the door with residential property. For starters, they needn't be registered for Goods and Services Tax (GST).

2. Buying or starting up a business is limited by the experience of the investor and the size of the market. Some people can't run a business or they don't have skills in the right areas to do so. It's a risky option for most.

3. Then lastly, they can access the New Zealand and Australian stock exchange listed companies very cheaply and easily. They only pay tax on those gains that are realised (if long-term investment then only the dividends are taxed). Outside of that however, if the investor buys shares in companies listed on the NYSE, Nasdaq, LSE, Borse Frankfurt or elsewhere, then over a certain threshold they'll pay tax on gains when they occur, not only when realised.

Conclusion:

Investors are strongly encouraged to invest in real estate, which has to impact Auckland house prices, given the size of that market. Investors cannot start or buy a business as the opportunities are scarce, given the relatively small scale of commerce in New Zealand. Allied to that, investors are discouraged from spreading their net wider, effectively limiting their share investments to the local scene. No wonder then that investor money pours into Auckland housing and real estate in general.

Recommendation:

Allow investors to invest in shares outside of New Zealand, on the same basis as they invest in shares listed in Australia, that is, invest in any company listed on recognised exchanges in the USA, Canada, Japan, the U.K., and Germany (elsewhere by approval). By doing this, money would be diverted from the overheated Auckland housing market. The effect would be to lessen demand for Auckland houses, and prices would stabilise.

(The change to NZ's tax regime regarding investment in foreign shares has had a knock-on effect to the Auckland housing market. This is the law of unintended consequences)

Edit to add (off the topic but looking at investment as a NZer investing overseas)...

The following NZ Herald article traverses many of the issues a NZ investor faces when investing overseas...http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10738730

The article mentions hedging, and what I've done in the past is not very sophisticated but effective, I've maintained a US Dollar account with a NZ bank. You're not dealing with a foreign desk, but the money is effectively offshore. Many people do not realise they can have a US Dollar account with a NZ bank. The good part of this is you get higher level people within the bank with better advice attached (the down side is that over a certain amount your name gets on lists in New York and you'll be bugged by investment houses on Wall Street. This is a freedom of information thing, I recall an outfit by the name of Whale Securities was one such calling all the time - look them up they were on Wall Street - you have to develop a thick skin and know how to say no).

Most 'experts' recommend using funds, such as unit trusts. My experience is they don't do that well. I'd guess my returns over a 20 or more year period would be about 1% annually going down that road. Don't be sold unit trusts.

Auckland House Prices

More news about house price rises in Auckland. I'm still amazed that this issue has not been presented accurately by the media. Is this because they also own houses in Auckland?

The situation is this - inflation is out of control. Residential housing was dropped as a link to the CPI (Consumer Price Index) some time ago. If it was still there we'd be seeing inflation like that of the mid-1980's, not this silly 0-2% we have reported now. 

It's monetary inflation, the banks are pumping cash into the system. It's ever increasing flows of cash chasing the same stock of housing. It can't go on as incomes will not be able to service the debt. New Zealand is headed for a bust.

New Zealand, What I Think Is Going On

Two things making the news right now, ever increasing house prices, especially in Auckland, and the plunging milk price paid to dairy farmers. 

Is it Chinese buyers bidding up house prices? Well I think, only partly, in a broader sense it's everyone buying houses, not just the one ethnic group of immigrants and investors.

What I think is going on is monetary inflation, or something akin to that, with money brought in by the banks, not just investors. If you look around the world most developed economies offer very low returns, while others such as Greece are actually bust. In NZ returns are much higher, so the banks look to shift their funds from low interest countries to places like NZ, and the result is funds available for lending to everyone. That means more money available chasing the same number of houses, equalling a general rise in house prices.

We are all recipients of this, particularly when we sell our houses at inflated values. The safety valve of sorts is that a large proportion of those sale proceeds heads to Australia, particularly the Gold Coast.

There is no easy fix here. If NZers are stopped from house trading then the result for the NZ economy will be dire. The house price inflation is just about all that is holding things up. To a certain extent NZ is like a drug addict, hooked on the banks supply.

A possible solution would be controls on the inflows and outflows of foreign exchange. A return to the seventies. It may have to happen.

Then we have the milk export price farmers receive. Something not pointed out but I think is relevant; what happened to world population, did they suddenly stop eating? Hmm? No they didn't, so the drop in NZ milk export price must mean global supply has increased. 

What did you think New Zealand, did you think the rest of the world would be prepared to sit there paying for your milk rather than make it themselves and much cheaper? The big buyers, like China, aren't sitting round twiddling their thumbs, they're setting up farms at much lower cost than in NZ and producing milk at home and in South America, Africa, Asia, even the USA. 

Further complicating this is the ban by Russia on imports from the EU. Dairy makes up a large proportion of that volume and now the EU are dumping their output anywhere they can find a buyer, directly competing with good old NZ.

Here yet again, is another lesson NZ fails to heed. Don't put all your eggs in one basket. NZ gets carried away on the latest big thing, and forgets we need a balanced, diversified and developed economy, making products with real value, middle and high tech, the lot. If we fail to develop, then we're going to see more boom and bust.