With property prices going through the roof and bank savings rates through the floor, what options do you have? If you do not currently have your own home, and you feel squeezed out of the property market before you’ve started, can you put your money to work in other ways?
- Another back-of-the-envelope calculation
- “Buy a business instead” (erm..?)
- Get your money working for you in other assets
Another back-of-the-envelope calculation
I obviously get too many direct-mail letters as I keep using their envelopes to do quick calculations. My latest iteration was the result of me pondering what people do if they have ‘missed out’ on property. They may have missed out because the rising valuations are too much for the deposit they’ve raised, or too much for the income-serviceability conditions.
Using some averages…
The Auckland house market has hit $1m for an ‘average’ home. Using a 20% deposit will mean needing $200,000.
To save $200,000, over 20 years, means saving $800 per month. To save $800 per month at a savings rate of 10% of income earned, requires an income of $8,000 per month (this is net income, not gross). Why 10%? Because there is every chance that these people will already be paying rent, so they are saving whatever disposable income they can.
$8,000 net income a month requires a yearly net income of $96,000, or rather $140,000~ gross (assuming a 3% KiwiSaver contribution rate).
Now I realise that first home buyers can potentially use their KiwiSaver towards their home. I realise that some people will have family and friends to help them. But…
The average household income is $60,000 a year. Not $140,000.
The above also assumes that people are saving for 20 years. Plus, in the meantime, property prices may very well just keep rising. Now tell me that if you “just work hard” you can buy a house. The numbers don’t stack up.
I understand that there will be many views out there from different perspectives about property. I am not going to get into an emotive or political discussion about property. What I am doing is raising a point that for many people, given the above example, property-ownership is going to be out of reach.
“Buy a business instead” (erm..?)
The other day I heard a radio snip on RNZ about a business selling brokering firm advising that “instead of buying a home, buy a business”. While I applaud the ‘out-of-the-box’ thinking, I wonder at that advice.
Buying a business is another way of using your capital (the deposit that you were hoping to use for a home). In buying a business you buy a cashflow or an income from that business. This is not an inherently ‘good or bad’ idea, it is an alternative use of your money.
If keeping your deposit money in a bank earning 0.5% interest is not attractive to you, then sure, it is natural to look at other options. Remember though that a bank gives you greater security.
Moving your money to other assets in search of greater returns is part and parcel of being in control of your personal finances. Buying a home will likely give you capital growth over time. Buying a business will give you an income, which hopefully you will grow over time. Both investment strategies are potentially sound. However, understand the risks.
Have you ever run a business before? Do you know about the high rate of business failures? Running a business can be extremely rewarding. Done well, you can grow a business, get an income from it, and sell it at a higher price some years later. However, this investment strategy it is not for the feint hearted, nor are you in any way guaranteed a return on your money.
Get your money working for you in other asset
Another option available to you is to invest in another asset class altogether. Investing in securities like the share market can provide a low-stress alternative. “Most people don’t know how to invest”. This was a quote in a podcast by the Economist recently, which underscores part of the reason why people tend not to use this asset class. Buying property appears to be easier than understanding stocks and shares.
Again, this is not ‘right or wrong’, but there are many ways that people can invest without needing to understand the full breadth and depth of the share market. Managed funds have been available since around 1860. The funds are from people who pool their money to buy a range of stocks and other investments. Your KiwiSaver is a managed fund. This is a tried and tested form of investing. You pay a fee to the fund managers so that they can invest on your behalf.
The expected returns are usually higher than you would see at a bank, although the risks are higher. While the long-term average returns of the NZX trend upwards, stock markets do fluctuate, and there is always a risk at any point in time that the value of shares will tumble.
In New Zealand, we are starting to see more products that are becoming accessible to more people. Unlike Term Deposits in a bank, where your money is locked up for three or six months (for example), many managed funds will let you extract your money within a week (3-5 days for example). This is good for people who may need access to their money at short notice. Perhaps that perfect home shows up after all.
NZ Funds have launched two products this year that make investing in managed funds easier.
- Wealthbuilder is an ‘unlocked’ KiwiSaver product, that invests in the same funds as their KiwiSaver, but you can access your funds when you need them.
- Income Generator is a fund that invests in the top dividend producing companies in New Zealand and Australia, targeting returns of 4-7% (over 5 years).
If property is out of reach for you, there are other investments you might invest in. Before you do however, understand what it is that you are trying to achieve. Are you putting your money to work for an income or to grow? What time frame to you have in mind? Lastly, understand the risks of different decisions. If you are unsure, always get professional advice. Research from the Financial Services Council suggests that your investments will be 4% better off if you do get advice!
[disclosure: Dominic Bish & Bolster Risk Management
provide class advice on NZ Funds
KiwiSaver and managed fund investments.
This article does not constitute personal advice]