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SIR BOB JONES T HE P ROP E RT Y ISSUE
Why I invest in property
BANK OF MUM & DAD How it can all go so wrong
THE PM AND MONEY Jacinda Ardern on investments
P E RSON AL F I N A N C E • P R OP E R T Y • M A R K E T I N S I G HT S • L IFE S TYL E
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• How to get started in property • Pay off my mortgage or invest? • Is now the right time to buy?
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Contents IN THIS ISSUE
REGULARS
16. JUNO Exchange We review the winter event Invest for your Generation.
18. Subscribe to JUNO
Subscribe to Win
Subscribe and go in the draw to win one of eight Dermalogica skincare packs, valued at over NZ$300 each.
20. What We Like A selection of the hottest products and events from around the country.
22. Essentials: Flower Power Put your best floral foot forward this spring with our recommended products.
94. Travel: Himalayan High Ute Junker goes on a hiking trip to the stunning area of Sikkim, in northeastern India.
97. Book Reviews JUNO reviews Sold! How to buy and sell your home with real confidence, by Nicole Jacobs, and Starting Out, Starting Over: A single woman's guide to money in New Zealand, by Susan Edmunds.
Subscribe to JUNO www.junoinvesting.co.nz/subscribe
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TOP 50 WORLD’S BEST VINEYARDS Craggy Range - Number 11 THE PEAK OF LUXURY Under the spectacular escarpment of Te Mata Peak, Craggy Range Winery presents a second-to-none visitor experience. A short stroll through the vines from our luxury lodges and boutique cottages, enjoy a relaxed and intimate seated tasting in Cellar Door or eat the best local and seasonal produce in elegant surroundings highlighting the breath-taking local landscape. 253 Waimarama Road, Havelock North, Hawke’s Bay, New Zealand | +64 6 873 7126 | info@craggyrange.com | www.craggyrange.com
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26. Do The Numbers Still Stack Up?
YOUR INVESTING Property
Is investing in residential property still worth it? Amy Hamilton Chadwick investigates.
30. Pay Off My Mortgage or Invest? Martin Hawes has the answer to this commonly-asked question.
34. What Is Your Mortgage Personality?
If you identify your money personality, it can help you work out the best mortgage structure for you, says Kris Pedersen.
36. Get Smart with Your Strategy There are a few ways to build a property portfolio. Investor David Whitburn outlines the ways that can help you succeed.
40. Is Airbnb Really Worth it? There are pros and cons of renting out your home on accommodation websites.
44. Case Studies JUNO profiles four different investors who have got into property in different ways.
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48. Finding Good Tenants Crockers’ tips for people letting out their residential investment property.
50. Rent or Buy: Whatʼs Cheaper? It might be cheaper to rent in the short term, but owning your own home has many benefits.
54. Property Academy Andrew Nicol, of Opes Partners, explains how to release the dead money inside your family home.
58. The Bank of Mum and Dad Claire Connell explores the hot topic of parents helping their children with a first-home deposit.
64. The CoreLogic Property Report Latest data shows small investors are getting back into the property market.
68. Is Now a Good Time to Buy? Auckland house prices are more stable, so what does this mean for would-be buyers?
70. The Tax Partyʼs Over New rules have changed the way property investors are taxed.
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YOUR INVESTING Personal Finance
72. Kids and the Money Tree What is the best way to teach kids about money?
76. From Popsicles to Prime Minister Prime Minister Jacinda Ardern reflects on her childhood and how it has influenced her future.
78. The Two Lives of Tara When Tara increased her KiwiSaver contributions, it made a big difference to her life.
81. Our PIR Problem 76
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Is your KiwiSaver account on the right tax rate?
82. How to be a Carbon Trader Carbon is a feel-good investment that can help us reach our climate change commitments.
86. How Do Kiwis Rate in the Super Stakes?
Brenda Ward explores NZ Super rates and compares Kiwis to retirees worldwide.
90. Business Vision We showcase three innovative Kiwi companies.
92. Jake MillerĘźs Unfiltered Game-changer
Property investor Sir Bob Jones is profiled.
YOUR INVESTING Market Insights
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99. Kiwi Investors More Confident Confidence has been growing, according to a new survey by the Financial Markets Authority.
100. Going Up, Going Down Economist Cameron Bagrie looks at how New Zealand is faring.
102. Stocks on the Move The rises and falls of four stocks on the Australian and New Zealand exchanges.
104. Snapshot A glance at events affecting the global economy.
106. IPOs: The Hot and Not The latest Initial Public Offerings to the market.
110. Greeks Face Herculean Task Greece’s new government has inherited a country bogged down by financial woes.
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113. Do the Stars Align for Libra? Facebook reveals a new currency called Libra.
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The Money I Wish I’d Made The rules of the game are, don’t let an opportunity go by. JUNO writer Martin Hawes wrote a bestseller about property investment in the 90s. It flew off the shelves and I saw it on many of my friends’ coffee tables. Some of those friends went on to buy rental properties. I met one of those early investors about a year ago. He still has a portfolio of rental properties and no longer needs a day job. He was travelling the world in a campervan and enjoying life, while his properties ticked over. Another friend inherited a share of her grandmother’s house. She worked hard, borrowed to buy it, renovated it, and still has it. Now money just drops into her account every week. I didn’t read the book, but I knew the principles: hold on to a rental property and watch it increase in value. The average house in New Zealand increases at 6.6 per cent per year on average. I even interviewed successful investors, who told me the secret of their success. But I didn’t do anything about it.
My husband and I often talked about buying a rental, we even visited open homes and did the numbers on Sorted.org. nz. Sometimes we worked out yes, we could stretch ourselves to get there. But there was always something that stopped us. One of us would have an unreliable source of income, there was talk of a downturn, what if we couldn’t find tenants? I regret all that indecision. Instead, we invested in our own home and yes, we will retire mortgage-free. But how much better would we be if we’d had multiple properties to cash in for retirement. In this issue, we talk to five people who did act, and made money. I admire and respect them for their courage and their hard work. And I think we can learn from them.
Brenda Ward JUNO Editor
Published By: Brenda Ward JUNO investing magazine, Level 1, 1 Byron Avenue, Takapuna, Auckland, or PO Box 331079, Auckland 0740.
junoinvesting.co.nz JUNO is an investment magazine published quarterly by Brenda Ward. You need JUNO magazine’s written permission to reproduce any part of JUNO. Advertising statements and editorial opinions in JUNO reflect the views of the advertisers and editorial contributors, not JUNO magazine and its staff. JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee its accuracy. Charts in JUNO are visually indicative, not exact. The content of JUNO is intended as general information only, and you use it at your own risk: JUNO magazine is not liable to anybody in any way at all. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. JUNO magazine does not give any representation regarding the quality, accuracy, completeness or merchantability of the information in this publication or that it is fit for any purpose. To advertise in JUNO, you must accept JUNO magazine’s advertising terms and conditions. Please contact brenda@junoinvesting.co.nz about advertising. JUNO is printed on an environmentally responsible paper. The paper is produced using elemental chlorine-free pulp, sourced from sustainable and legally harvested farmed trees. The magazine is recyclable. PRINT ISSN 2422-894X DIGITAL ISSN 2422-9741 COMPETITION WINNERS: AUCKLAND FOOD SHOW Mike McCormick and Lisa Wu
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ESSANO Simon Williams, Simone Goode, Yvonne Rothwell and Pip Witkowski
Editor Brenda Ward – brenda@junoinvesting.co.nz
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Meet some of our
Contributors
CAMERON BAGRIE
DIANA CLEMENT
AMY HAMILTON CHADWICK
Cameron is the managing director of Bagrie Economics, a boutique research firm. He was previously Chief Economist at ANZ, a position he held for over 11 years.
Diana is one of New Zealand’s leading writers in personal finance, investment and related topics. Diana’s favourite topic is the secrets of saving money. She writes for the New Zealand Herald and other publications.
Amy specialises in property and finance journalism. She has been a writer and editor for almost 20 years. Amy is a former editor of NZ Property Investor magazine and is a registered financial adviser.
MARTIN HAWES
ANDREW NICOL
JAMIE NUNNS
Martin is the chairman of the Summer KiwiSaver Investment Committee. He is an authorised financial adviser and offers his services throughout New Zealand. He also presents at seminars.
Andrew is an authorised financial adviser and the managing partner of Opes Partners. He has over 15 years’ experience in banking, finance, and property.
Jamie has been a property lawyer at Morrison Kent for over 18 years, and has acted for the New Zealand Government, Contact Energy, Precinct Properties and Queenstown Lakes District Council.
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PAUL GREGORY
TOM HARTMANN
VICTORIA HARRIS
Paul is head of investments at Pie Funds and the JUNO KiwiSaver Scheme. Before joining Pie in 2018 he worked at the Financial Markets Authority (FMA).
Tom is managing editor at the Commission for Financial Capability. His focus is helping New Zealanders prepare for their future lives beyond work, through the CFFC and Sorted.
Victoria is a senior analyst at Pie Funds and a portfolio manager for the JUNO KiwiSaver Scheme. Before joining Pie Funds, Victoria was a senior analyst and co-portfolio manager at Milford Asset Management.
KRIS PEDERSEN
MARK RUSSELL
DAVID WHITBURN
Kris Pedersen started Kris Pedersen Mortgages in 2007, and is highly ranked as a mortgage adviser. His clients range from top property investors to first-home buyers.
Mark is a partner in the Financial Advisory Services team at PwC. He specialises in the tax treatment of investments and managed funds such as KiwiSaver.
David is a lawyer and past-president of the Auckland Property Investors’ Association, author, and is a professional property investor and developer.
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YO U R I N V E S T I N G
Invest For Your Age There was a full house for the Winter JUNO Exchange reader event, held at the Kitchens by Design showroom in Takapuna, Auckland. We celebrated the launch of the Winter issue of JUNO, ‘Invest for your Generation’. It was a lively evening of inspirational speakers, exploring investing options for every generation. About 90 people of all ages attended. Kristen Lunman, who’s the GM of online trading platform Hatch, spoke first. A whiz in the start-up world, Lunman directed New Zealand’s first fintech accelerator. As Kiwi Wealth’s Director of Innovation, Lunman set up Hatch, an investment platform that opens up a world of opportunities for Kiwis wanting to invest. She explained how the platform came about after research into the habits of millennials.
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Guide for Every Kiwi, she said research showed that money increased happiness to a certain point. After that, happiness levelled off, and sometimes declined. The happiest people were those in creative and caring occupations, Holm said. Kiwis were often afraid of not having NZ$1 million to retire. However, she said you don’t need NZ$1 million to retire. She knew many people living happily off NZ Super. Finally, the co-founder of Hortinvest, Sharon Kirk, joined us from Wanaka. Sharon’s a horticulturalist who worked for Turners & Growers before starting her own export business. With husband Ross Kirk, she’s a founder of horticultural investment company, Hortinvest.
Lunman discovered they tend to be DIY investors, who want sophisticated, well-built platforms that make transactions easy. They demand transparency and honesty from companies they trust and are loyal to.
Kirk talked about the booming horticulture industry and the hot crops right now: wine, kiwifruit, apples and cherries. Hortinvest is the leading consultant in New Zealand’s emerging cherry industry, setting up orchards and packhouses, and offering investments in cherries that span generations.
Author and KiwiSaver expert Mary Holm spoke about the link between money and happiness. In her new book Rich Enough? A Laid-Back
To find out about the next JUNO Exchange event, enter your email address at www.junoinvesting.co.nz/newsletter
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Dermalogica offers professional-grade skincare solutions for men and women. Active Clearing Pack
Subscribe to win
Stress and hormonal imbalances, combined with environmental shifts and our busy lifestyles, are causing more breakouts and accelerated signs of skin ageing. NEW AGE Bright Clearing Serum and AGE Bright Spot Fader help accelerate skin cell turnover and keep skin clear of breakouts. And protect with Oil Free Matte sunscreen, SP30.
One of eight Dermalogica packs Normal Skin Range Pack
Subscribe to JUNO for a year (four issues) for $35 and you’ll go in the draw to win one of eight Dermalogica skincare packs, valued at over NZ$300 each. Go to www.junoinvesting.co.nz/subscribe Terms and conditions: 1. The prize is as stated, one of eight Dermalogica skincare packs. 2. Each Active Clearing pack includes AGE Bright Clearing Serum 30ml, AGE Bright Spot Fader 50ml, Clearing Skin Wash 250ml, and Oil Free Matte sunscreen 50ml, and is valued at NZ$386. Each Normal Skin Range pack includes Special Cleansing Gel 250ml, Daily Microfoliant 74g, Multi-Active Toner 250ml, Protection 50 Sport 156ml and is valued at NZ$326. 3. Prize is not transferable and is not redeemable for cash. 4. Offer expires on 31 October 2019. 5. The prize goes to the purchaser of the winning subscription, and not the recipient. 6. The prize draw applies to one-year $35 subscriptions only, and is not valid with any other offer. 7. Prize draw open to New Zealand residents, with a New Zealand postal address only, offshore islands excluded. 8. The winners will be chosen at random. 9. Prizes may differ from those listed. 10. No correspondence will be entered into, and JUNO’s decision is final. 11. All new subscriptions start with the next issue of JUNO, published late November. 11. View full terms and conditions at junoinvesting.co.nz/subscribe
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Achieve brighter, smoother skin every day with Daily Microfoliant, an iconic exfoliating powder for men and women that polishes skin to a healthy glow. The Special Cleansing Gel cleanses without disturbing the skin’s natural moisture balance. Multi-Active Toner is a light facial toner spray that hydrates and refreshes. And protect with Protection 50 Sport sunscreen, SPF 50.
REGULARS
What We Like
A showcase of the hottest products and events that are the talk of the town.
WIN A Toast to First Light Music, wine and the tastes of fresh food… Experience the beauty of New Zealand’s east coast at the First Light Wine & Food event in Gisborne.
WIN Sustainability You Can See McDermott discovered many Imagine a pair of prescription glasses made from recycled milk bottle tops, old Australian bank notes or beer keg caps. Now they’re a reality. Dresden, now with two stores in Auckland, makes its glasses from fully recyclable nylon and recycled discarded plastic. The lightweight, durable prescription glasses start from NZ$63. Founders Australians Bruce Jeffreys and Jason
plastics can be melted and moulded into new products.
Order online, or visit the store and your glasses can be made in 15 minutes, as long as you don’t have a complicated prescription. JUNO has one pair of Dresden multifocals and one pair of single vision glasses to give away. Enter at www.junoinvesting.co.nz/ competitions www.dresden.vision/nz/
Held at TW Wines, Matawhero Wines and Bridge Estate, the event promises an amazing day of friends, fun, great wines and superb food choices. Wine lovers will rejoice at the 14 varietals on offer – including rosé, sauvignon blanc, merlot, and famous Gisborne chardonnay. Enjoy top bites to eat from local foodies Flagship Café, Smokehouse Cuisine and Reka Cuisine.
First Light Wine & Food Festival is on 27 October. Tickets are $45. JUNO has two double passes to give away. To enter, visit www.junoinvesting.co.nz/ competitions www.firstlightwineandfood. co.nz
A bus service to, and then around, the three venues means there’s no transport issues to worry about. Your bus pass is included in your ticket. Live bands will get you up and dancing.
It’s My Treat
WIN
The event is a great excuse to book a long weekend away in a coastal paradise. The region offers sun, sand, and plenty of surf, plus adventure, natural beauty and authentic hospitality in this largely untouched part of New Zealand.
A monthly subscription box service is delivering treats to women around New Zealand. Founder Rosie Graystone launched MyTreat to surprise and delight Kiwi women who “take care of everyone but themselves”.
supplements and food are made from natural, organic, sustainably sourced ingredients. “The whole idea of MyTreat is to make our customers feel beautiful from the inside out,” Graystone says. JUNO has five one-off MyTreat boxes to give away. To enter, visit www.junoinvesting.co.nz/ competitions
The gift boxes include full-size body and beauty products, food, and underwear. All skincare, www.mytreat.co.nz
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W H AT W E L I K E
Eco Hotel a Smart Move New Zealand’s first ‘smart’ hotel uses the latest keyless technology and sustainability initiatives. The new mi-pad Queenstown, in the town centre, has eco-friendly operations designed to reduce the hotel’s environmental footprint. Motion sensors dim lights and adjust airconditioning and heating. The in-room cups are washable, reusable, and then recyclable. There’s a large living plant wall, with more than 500 native plants and ferns. Single-use toiletries have been swapped with refillable bottles, and there are recycling bins all around the hotel.
Owners have swapped traditional large hotel rooms for compact, sleek, and stylish rooms. They aim to encourage guests to enjoy the social zones throughout the property, including the roof-top terrace with stunning mountain and lake views. Guests can enjoy gorgeous weather in summer or snuggle up in winter by the outdoor fire. As for the technology? The key to the country’s first fully smart hotel is that there is no key. Guests booking their stay download the hotel’s app ‘mia’ to give them access to their room. They can adjust temperature, lighting and communicate with staff remotely using their smart phone.
Guests can also share experiences, photos or messages through mia’s private chat group. They can also use mia’s concierge service to order food delivery from Queenstown’s best restaurants through Food On Q or check out the latest events, activities, or offers in town. A year after opening its doors, co-owner Lewis Gdanitz is “delighted” with how the hotel’s been received. “It’s unlike anything else on offer in New Zealand, delivering affordable luxury using smart technology, and helping our guests conserve and minimise their effect on the environment.” www.mipadhotels.com SPRING 2019
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REGULARS
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Flo wer 2.
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ESSENTIALS
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Smeg D&G Kettle kitchenthings.co.nz
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10. Girl’s Newborn Poplin Dress in Portofino store.dolcegabbana.com 11. Designer Hand Basin in Bright Blue with Pink and Yellow Flowers isabelharris.co.nz
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ISSUE
22 SPRING 2019
Property Investment Noun (Australia & NZ)
Property has two types of potential returns. One is from rent paid by tenants and the other is from the property increasing in value – called capital gain. – sorted.org.nz
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The best investment on earth is earth. – Louis Glickman, New York real-estate investor
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YO U R I N V E S T I N G
PROPERTY
Property: Do the Numbers Still Stack up? It’s getter harder to be a landlord, with a raft of new rules, and a slowing housing market hitting house values. But is it still worth it? Amy Hamilton Chadwick investigates.
A flat market, extra costs, and more regulations. Is rental property investment in the too-hard basket right now? For decades, buying a rental has been a back-up retirement savings plan for Kiwi families who have a bit of money to spare. However, the Government and the Reserve Bank have put a number of hurdles in front of residential property investors, as they try to make the banking and property sectors safer. Some investors got out The upshot is that fewer investors are buying properties, CoreLogic data shows. “Investor share of the [new mortgage] market peaked midway through 2015 and dropped to its lowest point at the end of 2017,” says Nick Goodall, CoreLogic’s head of research. “Since then, we’ve seen a gradual return to the market, but investor activity remains a long way off its former highs.” That’s probably been a positive change, says Tony Alexander, chief economist at BNZ. “We’re in a phase of the property cycle where the fly-by-nightery, quick-capitalgain investors are being weeded out,” Alexander says. “With those opportunistic people out of the market, we’re left with a more professional core of investors.”
Full-time investor Rachel Ward has been working full time as a property investor and trader in Hamilton since leaving teaching in 2011. New regulations have made her job tougher and sometimes left her feeling frustrated, although she supports some of the new Healthy Homes Standards. For her, the biggest problem has been the Reserve Bank’s investor deposit rules. At one stage investors needed as much as a 40 per cent deposit, although now that’s down to 30 per cent. Meanwhile, Ward still has to face the dayto-day hassles of dealing with tenants. She says to make money on property, you need to treat it like a business. Research your market, don’t overpay, and make sure your property earns at least as much as it costs. “Even with problems, property stacks up for me because I can add massive value through renovations. If you’re prepared to work hard in the weekends and evenings, you’ll get ahead – and you can’t do that with shares. “I’m surprised more people don’t do it, because it certainly doesn’t stack up leaving your money in the bank.” The magic of leverage One factor means property can still stack up. It enjoys an enormous advantage over other asset classes – ‘leverage’,
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YO U R I N V E S T I N G
which is using borrowed money to magnify your investment results.
appealing enough to potentially offset the new regulations.
Banks will lend against property usually far more readily and generously than they’ll lend against shares or small businesses.
Factor in the new rules
“Property only increases in value slightly above inflation. In the absence of leverage, property is not a great investment,” says Ben Brinkerhoff, authorised financial adviser and head of partner firm services at Consilium. He says: “With tax benefits, leverage and skill, you can make money. “As with any small business, if I take it seriously, I can apply skill, hard work and my own common sense to do it better than other people and reap the rewards.” Add together leverage, elbow grease, and good decisions, and you can make property
Alexander says landlords just need to adjust their calculations to take the new rules into account, in the same way business owners in any industry need to adjust to changing legislation. He says there’s some pressure on landlords, but low interest rates make home loans comparatively cheap. And our strong economy means a rising population, solid job growth, and a continuing shortage of houses boost demand for rentals. It’s all about you But Alexander says it’s more about you than the state of the market when it comes to how successful you’ll be.
“We never think that rule changes will decimate the primary or manufacturing industries, so there’s no reason to think they would decimate residential property investing. “It’s the quality of the investor that is the key determinant of success, not house prices or market conditions. You’ve got to be professional and follow the rules.” If you don’t want to be a small-business owner, spending your spare time learning more about property investment and improving your rentals, it may pay to stick to a less stressful investment – maybe a managed investment fund. But if you want to take advantage of the power of leverage, and you’re prepared to work hard and adapt to changes, rentals can still add up to a solid long-term investment strategy for many people.
The Push and Pull of the 2019 Property Market
Flat market for some
Healthier homes
Letting fees
Lending is harder
Ring-fencing
If prices were rising, values would be going up. That would mean investors can borrow against rentals they own to buy again. But now, in a market that’s flat, capital gains are smaller or don’t exist at all. Owners may sell at a loss.
By July 2021, all private rentals must meet new Healthy Homes Standards, which include a fixed heating source, insulation, and extractor fans in the kitchen and bathroom. This adds to costs for landlords.
It's now against the law to charge a letting fee. A letting fee was a non-refundable payment new tenants had to make (usually a week’s rent plus GST) to cover the costs associated with property managers finding tenants.
Banks are stricter on lending now and they’re reluctant to offer interest-only loans, which have traditionally been a mainstay for landlords. This makes it harder to buy, and loans can be more expensive to pay back.
This tax change stops landlords from offsetting rental property losses against their personal income. It removes a tax advantage enjoyed by the owners of loss-making properties.
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Insurance prices
No capital gains tax
Low interest rates
Rising rents
Housing shortage
The cost of insurance has risen, and may go up further, adding to the cost of owning property. Some insurers are now using risk-based pricing, taking into account things like earthquakes, flood, and climate change risk.
The Coalition Government’s potential capital gains tax was concerning property investors across the country, worried about the impact it could have on their investments. With this threat off the table, investors have less to be nervous about.
Interest rates are available below 4 per cent and not likely to rise soon. All signs indicate the high interest rates of the past will not be back any time soon. This makes borrowing cheap and means savers are earning very little on their money.
Rents continue to increase slightly each year, driven at least in part by the rising costs of rental ownership. Landlords are being encouraged to make sure their rent prices match the market rate in their area.
Many parts of New Zealand are still short of homes and have a growing population. This demand underpins house prices and prevents them from falling too far. It makes it likely prices will begin to rise again soon.
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Pay Off My Mortgage or Invest? It used to be conventional wisdom to pay extra off your mortgage ahead of investing. But with interest rates so low and mortgages stretching 30 years, has that changed? Financial adviser Martin Hawes shares his views.
So, you have some spare money. Maybe you’ve just received a lump sum of cash. An elderly aunt might have left you an inheritance, or you’ve sold the boat. Or maybe you’ve just realised that you’re spending less than you earn and that the surplus has started to accumulate in a bank account. Either way, you have some spare money and you also have a problem. What are you going to do with it? Of course, this is a good problem – spare cash is not a bad thing! But you want that money to do something useful for you. What you do with that spare money depends on you, your situation, and your objectives. Save money on interest Whether you have a mortgage or not is one of the most important aspects. If you do have a mortgage, a quick and easy option might be to use that spare cash to repay some of the mortgage. This can apply whether that cash is a lump 30 JUNO |
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sum or extra income surplus. Either way, you can use that money to reduce the mortgage. If you use your surplus to increase your mortgage payments or use a lump sum to reduce the balance, you’ll pay the mortgage off quicker. You’ll also reduce the total amount of interest you’ll pay on the loan. This might appeal to you – less time with that mortgage monkey on your back and saving on cost is a great thing to do. But is it the best thing to do? Should you invest it, or put it into your KiwiSaver account? These are age-old questions. Whether to repay the mortgage before you start to invest has been pondered for as long as I have been in finance. How much can you save? The answer largely comes down to the interest savings you can make if you pay off the mortgage, compared to the investment returns that you’d expect to receive if you invest the cash. On top of that, you also need to think about the risks you’ll face for each.
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The case for paying off the mortgage
The case for investing
First, let’s think about paying off the mortgage. The interest that you’d save will be the interest you’re paying on the mortgage now.
The alternative to repaying the mortgage is to invest your lump sum or surplus. To do as well as paying off the mortgage, you’d have to get an investment return of 4.5 per cent a year, after tax and fees.
Let’s say you have a loan at 4.5 per cent a year. To pay off all, or part of, that mortgage means that you’ll save 4.5 per cent a year. Remember, you have to pay that with taxpaid dollars and we’re assuming that there are no fees to pay, so that’s not a bad saving. There’s no risk paying off the mortgage. However, there may be some ‘break fees’ to pay if you’re on a fixed rate. If these apply to you, you may want to wait until the fixed term has expired. However, these costs aside, there’s no risk or cost paying off the mortgage. You’re certain to save 4.5 per cent.
That growth portfolio will have its ups and downs. The fund should be well diversified, so it’s unlikely you’ll lose everything. But over the long term – say 10 years – there’ll be times when the markets are down, and you might wish you’d paid off the mortgage.
That sort of rate of return is possible, but not without some risk. To get a return of 4.5 per cent a year after fees and tax, you’d probably have to invest as a ‘growth’ investor. This would mean putting your money in a growth fund, with more weighting towards the riskier shares and property, say 60 per cent. This means you’ll take on more risk, but you’re more likely to get better returns over time.
You could take on more risk and invest in an aggressive portfolio (80 per cent in shares and property and 20 per cent in bonds and cash). That sort of portfolio would probably give you better returns, and you’d be better off than if you’d repaid debt.
After you’ve paid fees and tax, you could expect to be about as well off as the people who paid off their mortgage.
When you adjust for risk, investing that spare money may not be a good idea. Paying off the mortgage gives a net saving of 4.5 per cent a year, but you’d have to stick your investment neck out quite a bit to beat that.
However, there is risk in investment – there always is.
However, that riskier portfolio would mean you have to expect a lot more times when the portfolio would lose money.
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Three exceptions Paying off the mortgage before you start to invest is the best policy for most people. Any spare money you have should be used to reduce your mortgage. However, there are three exceptions: KiwiSaver. Don’t wait until the mortgage is gone before you join KiwiSaver. KiwiSaver is different, because of the extra contributions from employers and from the government. This free money makes KiwiSaver a very good deal, one that’s far better than using the same money to pay off debt. Join KiwiSaver whether you have a mortgage or not. However, unless you’re close to buying your first home or close to retirement, I say to only contribute the minimum amount, to get the maximum employer and government contributions. That’s because KiwiSaver is not a ‘liquid
investment’. It’s locked in until you buy a first home or retire, and it’s possible you might need the cash at some time. Even if you’re self-employed, you should still join KiwiSaver and add NZ$1,042 each year. If you do that, you’ll get the maximum government contribution of NZ$521 every year. Good debt. The numbers, and therefore the advice, is different if you have debt that’s tax-deductible. Perhaps you borrowed to buy a rental property, or you have a business. In effect, debt is cheaper if you can deduct the cost of it, so the investment return you’d have to look for is correspondingly lower. If you’re on the top tax rate of 33 cents, that 4.5 per cent threshold that you’d have to beat comes down to an investment return of just 3 per cent a year, after tax and fees. That’s easier to beat and could be done with lower risk.
Aggressive, skilled investors. There are people who invest aggressively and back themselves to get outstanding investment performance. They may buy rental property, which they gear up with more debt, or they may own a very targeted share portfolio. Often these strategies will be quite risky, and their plans may or may not always work out. But there certainly are people who will beat the market often enough to make investing that spare cash worthwhile. What’s the best option? Even with interest rates as low as they are at the moment, most people are best to put any spare money into their mortgage. This will pay the mortgage off faster and, most likely, save you thousands of dollars in interest over the life of the loan. Investing spare money could possibly make you better off than paying off the mortgage – but for my money, it’s not worth the risk.
Martin Hawes is the chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at www.martinhawes.com. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser before making any decisions.
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Success on every level. Established in 1986, Viranda is a privately-owned property investment and
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What Is Your Mortgage Personality?
Just like people, not all mortgages are alike. There are different solutions for different money personalities, says Kris Pedersen, of Kris Pedersen Mortgages. Identify your money personality to help find the best way to set up your mortgage.
The Saver
The Scrimper
Disciplined saver, lots of income, not much equity.
Lower income, finds it hard to save, money’s tight.
Savers are usually easy to spot because they’re usually sitting on a good surplus in a savings account. They’re usually wary of the rainy day when they’ll need it. But for many, that’s not a good use of their money. If you’re a saver, a revolving credit or another type of offset account might work better.
If you don’t have much spare cash floating around, fixed rates can be a good way to go here.
A revolving credit facility is like a large overdraft, but at floating mortgage rates. Put your savings into this account too, so you, rather than the bank, benefits from the interest rate margin. The best way to explain an ‘offset’ is if you had a NZ$100,000 floating mortgage and a NZ$30,000 savings account. You’ll only pay interest on the difference between the two, in this case NZ$70,000.
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They can give you certainty, so you’ll always know how much you’ll pay. It’s worth thinking about splitting your fixed rate mortgage into two or three chunks. If rates were to spike up, you won’t have all your debt coming off a fixed rate at the same time. An example: For a NZ$300,000 mortgage, you might decide to put NZ$100,000 on a one-year rate, NZ$100,000 on a two-year rate and NZ$100,000 on a three-year rate.
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Spenders will use any excess funds to get the next pair of shoes or a trip to Fiji. Revolving credit is not your friend!
The Spender
The Starter
The Supersizer
Money disappears like water, has only a small deposit.
First-home buyer, new to a mortgage.
Already has a home partly paid off, payments are no stress.
If you’re a spender and aren’t the best with money, avoid revolving credit. Spenders will use any excess funds to get the next pair of shoes or a trip to Fiji. Revolving credit is not your friend!
Often people don’t know what their money personality is until they’ve taken out a whopping big mortgage. It’s worth being a bit flexible here, to see if you’re a saver, or if your spending personality takes over and you need to be careful.
If you’re a Supersizer, look at using a revolving credit facility, as long as you’re not a spender. Or, look to increase what you’re paying on your fixed mortgage splits.
Take away temptation. This means a fixed mortgage. Often it’s high-income earners who fit into this category because they’re used to having more spending money. If so, they should look to put themselves under a bit more pressure and lock in higher repayments than they need. This may offset some of their excesses elsewhere.
If you don’t know which type you are, split your mortgage into a few sections. Keep most fixed, but put a small amount on revolving credit. Put income onto the revolving credit facility, and charge your living expenses to your credit card, paying it off just before you’re charged interest, using your revolving credit. But if you’re finding you’re drawing on your revolving credit for other reasons, fix the mortgage and remove the revolving credit.
With most banks, even if your mortgage is fixed, you’re able to pay a bit extra off without penalty. Check your options before you do this. This option is a great way to accelerate paying off your mortgage, so you can get that noose around your neck off faster. Disclaimer: This article is general in nature only and has not taken into account any particular person's objectives or circumstances. Seek financial advice before making any decisions on your mortgage structure.
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Get Smart with Your Strategy How do you build wealth through property? Property investor and developer David Whitburn outlines the strategies that can help you succeed.
Property investment is just like life. To get the best results, it’s important to know where you’re heading and how you’re going to get there. People with the best plans in place, with strong cashflow portfolios, may be able to give up their day job.
some or all of the loan principal, which further increases your equity in the property. Two variations include: •• Improve and hold, where you renovate a property to add to the income and capital value of the property •• Develop and hold, where you add buildings to the property, often subdividing, to get increased income and create equity growth too. How involved are you? Decide how much you’d like to be involved. Are you going to be hands-on as an active investor, or are you more of a passive investor? Some people have the time and skillset to be productive as hands-on property investors. This depends on a range of factors, but it’s certainly not a prerequisite to be hands-on. Be prepared – as your portfolio grows, property can become like a fulltime job. The key is to identify your strengths and your weaknesses. Don’t be afraid to connect with experience and seek help when you need it. Growth or yield?
Before you start, ask yourself what kind of passive cashflow are you seeking to build up and ultimately retire on. What levels of equity do you need?
Some properties generate stronger cashflow returns through rent or lease income, and others generate stronger equity returns (grow in value).
What’s your investment timeframe? Where should you invest? What types of property should you buy?
In general, commercial property, with net leases, generates stronger cashflow returns, but this isn’t always the case. There are three things to focus on in property investments: cashflow, equity, and growth.
Buy and hold Buy and hold is the plain vanilla property investment strategy. You invest for the long term to build up significant passive cashflow. You also grow your equity, by getting an increase in the property’s value. You buy a property for the long term, to get a regular return from it. You’ll hopefully also get the benefit of capital appreciation as the property hopefully increases in value over time. You’ll get tax deductions on what you spend to run and maintain the property. Over time you’ll repay
••
Cashflow is crucial because it pays the bills, and most investors have loans (at least at the start) to finance their purchase. It’s always nice to have more money in your pocket at the end of the month than you had at the start of the month.
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Equity is important too, because as you own more of the property, you lower your investment risk. By building equity, you have future sale options, or you can refinance and redraw equity from your portfolio, perhaps to buy another property.
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••
Growth is my favourite. You get two bites of the cherry with growth. You’ll get growth in cashflow as rents rise over time, and hopefully growth in equity. This is where population trends are your friend. Pick cities that are growing. Infrastructure and employment bring population growth. Watch for cities with new subdivisions, new malls, and a growing café culture. The best performers in my portfolio have been in suburbs that had strong infrastructure being put in, such as around Westgate Town Centre in north-west Auckland, and around Auckland International Airport.
Roll your sleeves up Are you interested in creating the full deal – by building, renovating, or subdividing? For some investors, engaging tradespeople, builders, architects and surveyors is a step too far and too much risk. However, there can be great returns for those ready to take on this kind of risk. For example, it’s not hard to do a cosmetic renovation to add to your rental potential, increase your cashflow, and add value to build your equity. For some properties, it’s as simple as boosting the street appeal by weeding the gardens, replacing the rusty old 1970s steel letterbox, or painting the front door. 38 JUNO |
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Maybe you’ll go one step further and repaint, or replace the carpet.
heading lower, the impact of the new rule isn’t cause for alarm.
The degree of difficulty increases when you have to redo kitchens and bathrooms, or if you do restricted building work like moving plumbing fittings around or moving load-bearing walls. Getting council permits can delay work and make life hard for your tradespeople.
The other rule you need to be aware of affects you if you sell a property within five years of buying it. Not only do you miss out on capital growth, but you also may fall foul of the ‘bright-line test’, and Inland Revenue may rule any gain you made was ‘capital income’ – and tax it.
Subdividing to create multiple titles can be an exciting and lucrative way to build a significant portfolio. I’ve tried the strategy of build to hold myself, and found it worked for me.
The idea of property investing is to get enough income from your properties over time that you can give up your day job or business. Many professional investors have achieved this level of success.
However, it does increase your risk and the amount of money you need to borrow. To reduce your risk, seek expert advice, and consult a quantity surveyor.
Other ways to invest in property
New rules Be aware of new ‘ring-fencing’ rules, which mean that negatively geared (loss-making) portfolios can no longer be offset against your personal income tax. Investors have long used the ability to do this as a handy tax advantage, but it’s no longer possible. This was long foreshadowed in tax policy by the Labour, Green and NZ First political parties and it’s very unlikely to change. With rents on the rise and loan interest rates near record-low levels and likely to be
If direct investing and becoming a landlord or developer doesn’t appeal to you, there are several other ways to invest in property. You can invest in property funds listed on the share market in New Zealand, real estate investment trusts (REITs), many overseas-listed property options, or joint ventures and partnerships. Or you could consider lending to others for a return on property investment. There are plenty of ways to get into property investment into New Zealand, if that’s your goal. Just make sure you get independent financial advice to find out what’s best for your situation.
ADVERTORIAL
Investors Back Cherry Projects Four cornerstone investors have underwritten the first trees for Hortinvest’s two multi-million dollar cherry orchard projects in Central Otago. The first stage of planting is now under way at Lindis River and Mt Pisa, as horticultural investment company Hortinvest moves towards fully subscribing its $15.5 million, 80-hectare projects. Both have drawn widespread interest domestically and internationally – and they’re more than 40 per cent subscribed already. Marketing and sales manager Sharon Kirk says negotiations are continuing with several large corporate investors over the remaining units. Other medium and smaller wholesale investors are on track to complete due diligence by 27 September. “The response has been fantastic and wide-ranging, with a mix of investors, including family trusts, expressing interest,” she says. “The traditional beef and sheep landowners of Lindis Peaks Station and Mt Pisa Station, where the cherry projects will be developed, have invested for the long-term. They’re committed to seeing the projects come to fruition,” Kirk says. Sustainable investments “Buy-and-hold investments of this type can generate an excellent passive income,” Kirk says. “Planting a cherry tree is long term, as it takes several years to come into production and several more to reach peak production. “Managed properly, a tree will continue to produce for up to 40 years. In planting orchards, we’re investing in the future of the young people in this country.”
Strong export prices and on-farm profitability offer an incentive for further investment and expansion, Kirk says. The minimum investment in each Hortinvest project is NZ$100,000, spread over four years. At full production, financial year returns from 34 to 59 per cent are based on 12 and 18 tonnes per hectare.
Hortinvest is led by experienced horticulturalists, Sharon and Ross Kirk.
Additional land is available for future projects, which might include blueberry and apricot developments. Hortinvest offers a grower-packershipper model, so it can achieve maximum returns for investors.
An investment hot spot Kirk says the world is waking up to New Zealand as a horticulture investment hot spot.
Projects at a glance
“Multinationals, such as Germany’s BayWa, have invested in recent years and locally, large investors such as iwi, managed funds and corporate syndicates are turning to horticulture as a sustainable, high-returning investment for the long-term.”
• • • • • • •
The Central Otago region is recognised globally for producing New Zealand’s best cherries, and accounts for 90 per cent of supply.
Value: NZ$15.5 million Scale: 80 hectares Water source: Clutha River Production: first harvest 2021-22 IRR: 20.8-25% first 10 years ROI: At peak mature production, 34-59% Investment: NZ$100,000 over 4 years
Contact
However, the Southern Hemisphere is responsible for only five per cent of global production.
Ross Kirk Project and orchard manager
Kirk says this creates a large, untapped potential for growth in the cherry investment space.
Sharon Kirk Marketing and sales manager
China is the biggest and fastest-growing global market for New Zealand cherries, with some 400 million middle-class consumers seeking premium, healthy produce. But other markets are rapidly emerging in Asia and Europe.
Hortinvest invest@hortinvest.nz
Information Memorandums for Lindis River or Mt Pisa are available. Contact www.hortinvest.nz
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Is Airbnb Really Worth it? Thousands of Kiwi homeowners are raking in returns from Airbnb, but it’s not without some risk. Diana Clement investigates the pros and cons of renting out your place.
Kiwi homeowners are pocketing as much as NZ$700 million a year from Airbnb and other holiday rental websites. Recent figures from Statistics New Zealand show that owners’ income from these accommodation platforms has trebled since 2013. Tens of thousands of Kiwis are letting everything from spare rooms at home to luxury accommodation. Although bach rentals have been around for decades, Airbnb means ordinary Kiwis can easily rent spare rooms in their homes to travellers. For some ‘hosts’ it can be very lucrative. Many earn more than NZ$100 a night from guest suites and granny flats that can’t be let legally under the Residential Tenancies Act to long-term tenants.
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Earn five figures Some hosts report earning five figures annually. The money’s used to supplement their income or NZ Super, pay down debt and mortgages, take holidays they couldn’t otherwise afford, or invest. For many, it’s a profitable side hustle. But there are costs, such as tax, insurance, cleaning, and depreciation. Holiday rentals are also becoming increasingly competitive, driving down nightly rates. Is it worth the admin hassle? It can also be a nightmare when it all goes wrong. Wild parties, theft, mess, and damage. A quick Google search reveals horror stories from around the world. You likely know a friend, or a friend of a friend, who hasn’t found Airbnb a smooth ride. And, if you haven’t declared it on your
home insurance policy, that may bring issues if, or when, things go wrong. The platforms can offer a relatively easy way to earn money. But hosts sometimes find that the reality isn’t as rosy as the warm friendly language used to sell the idea to them. The guest is never wrong Airbnb talks about ‘sharing’, but it’s really just another booking platform, which hosts are finding tends to lean in the favour of the guest when things go wrong. Some hosts find there are too many risks sticking with one platform alone. Some Airbnb owners have found themselves suddenly removed from the platform with no right of recourse, after being accused of breaking a rule. Sometimes they’re not even told the
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rule they’ve broken. And your ranking is constantly at risk. So, anyone serious about making money from holiday rentals won’t just list on Airbnb.
to drive prices down. New hosts will undercut existing hosts to get the allimportant feedback, which is crucial if this is a long-term income solution for them.
They’ll list on many booking platforms, including Bookabach, Booking.com, Airbnb, HomeAway.co.nz, Holidayhouses. co.nz and others.
Banking on Airbnb for an income can be a problem. Hosts in Auckland, Queenstown and elsewhere have found that the local council can have an impact on their operations with little notice.
You can get third-party software to synchronise your calendars, so you don’t end up with double bookings. New listings win Airbnb’s algorithm pushes new listings to the top and regularly drops existing homes down the rankings, causing business to nose dive. Airbnb says it’s to give new hosts a chance to get established. Cynical owners, however, believe it’s
Owners took a rates hit In Auckland, the council started charging commercial rates to owners of self-contained spaces that let them out for more than 28 days a year. Rates doubled or trebled overnight for hosts who declared their businesses. When it came time to sell, some hosts found it hard to shift the properties,
because the houses must be sold with the higher rates bill in place. In Queenstown, Airbnb owners are charged a mixed rate, and the council is pursuing the idea of a ‘bed tax’. More councils may follow, with a range of restrictions. Overseas, some cities have banned Airbnb completely after too many rental properties were converted into holiday accommodation, creating a housing crisis. This could happen in New Zealand too. There are other fishhooks. Some body corporates in apartments or strata title properties forbid short-term rentals. And owners of cross-lease properties should consider whether other leaseholders could prevent them from letting their home.
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Airbnb: ‘Friends we haven’t met yet’
Hosts get to meet guests from around the world and learn about different cultures, and the same for the people they are hosting.
Marian Makkar did her PhD on Airbnb. She’s an Airbnb host, administrator of a Facebook community dedicated to shortterm rentals, and an academic researcher at AUT University. She’s found that, like any business, homesharing requires start-up costs to get guest-ready. “But after the first couple of guest stays, your early investment is covered,” she says. “Start-up costs might be things like toiletries and amenities, new sheets, a professional photographer, and your time and effort, such as decluttering the space, cleaning, and welcoming guests.” Hosts able to take on hosting full-time can make a lot of money, says Makkar.
cultures, and the same for the people they are hosting.
“I’ve met several hosts that started hosting in their homes and moved up to buying other properties and putting them on Airbnb.
Researchers are coming to see platforms such as Airbnb to be more consistent with a ‘caring economy’, she says.
“Then there are hosts that are very content with renting out a room or a granny flat to cover smaller costs such as paying off bills or saving for future renovations. That’s possible too.”
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But the money doesn’t flow without effort. A successful host is one that that shows hospitality and care, says Makkar.
Airbnb isn’t just about the money, says Makkar. It can also be enjoyable and lifeenriching.
“Better customer service in this case is about going above and beyond for your guest. Small things like a welcome drink, snacks in the room, a thank-you for visiting note, and even a chat or advice can go a long way with guests.
Makkar says hosts as well as guests chose Airbnb not only because it made money sense. Hosts get to meet guests from around the world and learn about different
“A good Airbnb host should not see guests as dollar signs, but more like ‘Friends we haven’t met yet’. The financial gains will follow.”
ADVERTORIAL
Dream Home Disaster? If you buy off the plans, you could get a house that might not be what you signed up for. Property lawyer Jamie Nunns explains how to protect yourself.
Buying a property off the plans is popular for first-home buyers and investors. You can enter the housing market with a new property up to the current building code, with all the latest design specs. No repairs or renovations are likely to be required for many years to come, and there’s time to arrange finance. But there can be risks, too. What do you need to look out for? Prove to the bank Banks can be conservative regarding loans when buying off the plans. While you’ll need to have a deposit upfront to secure the property, you’ll also have to meet the lending criteria from the outset and when the time comes to settle. If there’s a long lead time before your property is built, there’s a risk that interest rates and lending criteria may change. Get expert advice Seeking quality legal advice should be high on your to-do list. A good lawyer can advise you at each stage to ensure your interests are well looked after. Give your property lawyer plenty of time to check the agreement thoroughly. Ask them to carefully go through the details of the development purchase plans, and the sale and purchase agreement. I recommend making sure there’s a ‘purchaser solicitor’s approval clause’, which may give you an opportunity to cancel the contract. Often you can ask for one to be inserted into the sale and purchase agreement.
Deadlines can change If the deadline passes without the building being finished, you won’t have a home. A ‘sunset clause’, is one way to reduce this risk, by adding a date where the contract can be cancelled by you. You get a longer settlement period when you’re buying off the plans, which allows you time to arrange finance. But if the market fluctuates over time, you might have trouble if you plan to sell the property, especially if it took longer to complete than you expected. Have a realistic view Artist’s impressions paint an idealistic (sometimes unrealistic) image of your new build. You have to look past these and visualise a realistic outcome. Carefully look at the plans and specifications attached to the sale and purchase agreement. Your lawyer should check they outline a timeline for completion, materials to be used, and ensure the detail meets your reasonable expectations. Make sure you understand the contract and the plans, and ask your lawyer any questions. Before you sign is the time to sort out anything you aren’t comfortable with. Changes may cost you Find out exactly what changes you can make to the plans, if any. Find out the likely cost of any changes too, for example, extending the wardrobe, or adding extra power points.
Changes or upgrades can cost you a lot more if not negotiated up front. Some provisions give developers the rights to make changes to the floorplan without sign-off from you. Be aware that usually your sale and purchase agreement will include an ‘entire agreement clause’, which will disregard all previously indicated plans for the development. That means you could end up with a significantly different apartment than the one illustrated in the original brochure. Body corporate costs If you’re buying an apartment or other unit title property, look closely at the body corporate rules. These rules outline the obligations and restrictions owners face. They could restrict pets, or noise, short-term renting and specify the use of shared spaces. You need to know that these rules are neither unreasonably strict, nor too vague. Buying any property, particularly one that doesn’t exist yet, can be stressful and full of pitfalls you want to avoid. Keeping a close eye on all contracts, along with expert legal advice, can help avoid problems. It’s best to put in the hard work and due diligence before you confirm, rather than face issues later. Disclaimer: This article gives you an overview of risks and factors to consider when looking to buy off the plans, but it’s crucial that you get specific and expert legal advice to protect yourself and your investment. This information should not be taken as legal advice and should not be relied on for that purpose. For advice tailored to your property or investment goals, get in touch with Morrison Kent’s specialist property law team.
YO U R I N V E S T I N G
My Portfolio Is Looking After Itself These Days Kesh Maharaj timed the Auckland property boom well, and now has plenty of properties to show for it. He now works 20 hours a week. As a teenager in Fiji, Kesh Maharaj looked around and took stock. It was 1987, there had been a coup, jobs were scarce, and wages were low. “It felt like the future was bleak in terms of opportunities,” he says. Maharaj applied for as many overseas universities as he could. He was ultimately accepted at Waikato University. Maharaj arrived in 1990 with NZ$800 in his pocket to pay for his first semester – and he never looked back. His destiny was now in his own hands. “I got my Bachelor of Management Studies,” Maharaj says. “Then I got a job with a chartered accountancy firm a year before graduation, out of 700 applicants. This got me a work permit to stay here. “I’ve still got that job offer framed on my wall. The salary was NZ$21,999, which was twice what my dad was being paid in Fiji.” Long days driving his career Maharaj excelled at work, putting in 50-hour weeks and rapidly rising up the ranks. He became a chartered accountant and finance director. He got married, bought a house, and his first child arrived. But he found he barely got to see his son. He was always leaving home early, and later, arriving home to a sleeping baby. When his mother died in his arms after a battle with cancer, he knew he needed to seriously re-evaluate his priorities. 44 JUNO |
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Time to make a change Making a five-year plan, Maharaj began researching ways to earn an income that wouldn’t require him to sacrifice his family or his health. “I looked at all types of businesses. Then I realised the family home had gone up by NZ$100,000 with me doing nothing. After more investigation, I found property investment met all my criteria.” With six months’ savings in the bank, he quit his six-figure job and became a property investor. Maharaj thought South Auckland had great prospects and began buying one or two rentals a year from 2002. After renovations, each was producing an impressive 10 per cent yield and he was making a profit. By the time the Auckland market went through its boom of 2012 to 2016, Kesh already owned a large number of properties. He had timed the market well. All of them rose dramatically in value. The typical standalone house he paid NZ$250,000 for is now worth closer to NZ$700,000. Rents, too, have jumped up. The average rent on a three-bedroom residential
property in Manurewa, Auckland, was around NZ$300 per week in 2007. Now it’s NZ$530 a week. An income and lifestyle package His substantial portfolio now provides him with triple the income of his old job, the net equity is rising every year, and it allows him to work just 20 hours a week. “I get to spend time with my wife and sons [now 17 and 14] and we can travel. Health-wise I’m the fittest I’ve ever been. I could live a more luxurious lifestyle, but I get a lot of pleasure from the simple things in life, jumping into the water, going for a run, or playing football with my boys.” You couldn’t replicate his exact strategy in today’s market – “the returns don’t work” Maharaj says. But he says anyone who works hard and does their research can find a way to succeed, whether it’s in property or something else. “You’ve got to investigate and become an expert in your niche. Find the low-hanging fruit. Work your side project, then when it’s generating 60 or 70 per cent of your current income, leave your job. “There’s an element of risk, but when opportunity knocks on the door, you need to be right there, ready to open it.”
PERSONAL FINANCE
We Put Our Heart and Soul into it Tenants damaged their Hamilton rental, but Stephanie Graham and Gary Forster didn’t let it stop their property investment journey. Auckland-based office administrator Stephanie Graham and builder Gary Forster dreamed of a rental property helping them prepare for their retirement. So, they poured their heart and soul into a rundown house in Hamilton, turning it into an attractive home they’d have been proud to live in themselves. Travelling from their home in Auckland each weekend, they worked on the house. Says Forster: “A lot of people had had a look at the place and moved on because they thought it was just too much to do. “Structurally, it was sound, but it needed a tidy-up inside. We did a kitchen redesign that we really put some thought into. We re-clad the outside, and it needed a new bathroom.” They did the work themselves Paying professionals to do the work for them would have cost about NZ$100,000. They saved a lot of money by doing the new kitchen, bathroom, fresh paint, new carpet, wood laminate flooring, insulation, and outdoor decking themselves. “Basically, we made it a home as we would like to live in it. Warm, comfortable and fresh,” says Forster. As new landlords, the couple were happy with it and proud of what they’d done. Friends helped them find tenants, and all went well for a while. But when the tenants fell behind with rent payments and moved out, the pair knew they would have to do repairs.
The house was damaged The upkeep “wasn’t good”, says Graham, and a leaking fridge had damaged the new laminate floor, which had to be torn up and replaced. The tenants caused about NZ$3,000 worth of damage in materials alone, Forster estimates. “They just weren’t suitable tenants,” recalls Graham. “But it was nothing we couldn’t repair.” The pair didn’t claim on their insurance because they had just a week to knock the house into shape before the new tenant moved in, so they got stuck in. Now they have a lovely tenant, and went on to buy a second property next door to the first. A small profit this year Rent is covering their mortgage and expenses – and they expect to make a small profit on each of the houses. They didn’t have to put any money into it at all, other than the renovation costs. “That’s the reason for buying in Hamilton,” says Forster. “The rent should cover the mortgage and expenses, so you don’t have to add anything into it.”
They’re pleased they took the first step, he says. “I’d always been sceptical of rental properties, but we signed up with Property Apprentice. It made it a lot easier, because they gave us a lot of information.” Graham says: “Buying your first home is always scary. But once you’ve done it the first time, you understand it.” The pair paid NZ$265,000 for the first house in 2016. Now it’s valued at nearly NZ$400,000. The second house was in better shape when they paid NZ$370,000 for it last year, and they’ve improved that one as well. Hard work When they look back, renovating was tough. The travel and late nights took their toll, says Graham. She adds: “I used to come to work tired and moaning, with paint all over my hands and say, ‘I’m over it!’. But it is very rewarding, and now we’re really proud.” Will there be a third rental? Forster laughs: “No, it’s a lot of work. It’s satisfying at the end of it, but it is a lot of work. And we don’t want to get too greedy.” SPRING 2019
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I Scoured Property Newspapers at age 14 Monique Oosterbaan bought her first investment property at age 25, before her first home. Monique Oosterbaan’s always been passionate about property. As a teenager, she spent her spare time trying to find a rental property for her parents to buy. They didn’t have one, and weren’t really interested. “But I managed to convince them,” she says with a laugh. She was just 14 years old. First investment at 25 years Fired up by that experience, Oosterbaan, a project manager for a digital web company in central Auckland, bought her first rental property at age 25. She says she was keen to buy a first home for herself, but she discovered she couldn’t afford anything in Auckland on a single income. Oosterbaan was looking on the outskirts, in places like Wellsford. She would put in offers but always missed out. Then the loan-to-value rules changed, and she found herself priced out of Auckland entirely. Oosterbaan, now 29, changed her focus to Tauranga and eyed up an investment property. She bid at 10 auctions and missed out on them all. “I eventually looked in Taupo and prices seemed to be really good for new builds, compared to what I’d been looking at.” She bought a four-bedroom, two-bathroom house-and-land package in Taupo in mid-2016, 18 months after she first started looking. “I was looking to find a property that, long term, would support itself.”
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How she did it
Her first home
Oosterbaan took five years to save the $90,000 deposit.
Oosterbaan and her boyfriend are now building their first home in Kumeu, on the outskirts of Auckland. They’ve found that having two incomes made it easier.
“I guess I’m quite a bit of a saver. “I wouldn’t call myself extravagant with anything I spend. I like to see it growing in my account.” She says she was lucky to be able to live at her parents’ home rent-free. “It was a long journey to save that deposit, and I was lucky they could do that for me because I know not everyone is in that situation.” She hired a property manager Oosterbaan now has a property manager looking after her house because she’s not living in the area. She says it would be hard to keep up with the ever-changing rules covering tenants and rental properties. “I was careful about the first person that went into it – I didn’t want a smoker or someone with pets, because it was brand new. After the first few months, we suspected he was a smoker and found that he did have pets.” Since then, it’s been smooth sailing.
They raised the deposit using her boyfriend’s KiwiSaver money, some savings, and equity from Oosterbaan’s Taupo property. More rental properties Oosterbaan says she learned you need to create equity in the property yourself, rather than relying on the current market to bring capital gains. This wasn’t possible with her new build. But for her next investment property, she wants an older home she can renovate to add equity. Oosterbaan has a tip for hopeful buyers. “You just have to keep persevering,” she says. “Things happen for a reason, and you just have to keep going until something works out. “It took me 18 months to get there, but it gave me a whole lot more time to save for a deposit. I ended up with a better product at the end.”
I Bought Up Damaged Properties Lee Bennett bought earthquake-damaged buildings in Christchurch and turned them into a rental portfolio. But it hasn’t all been smooth sailing for this keen investor. Lee Bennett became a property investor by accident. He was a maintenance worker at Christchurch’s Grand Chancellor Hotel when the February 2011 earthquake struck. He fled as the building started to collapse, and he and the other staff were lucky to escape largely unharmed. With the hotel in ruins, Bennett was out of a job – and he’d just bought his first home with his new partner Petra, who he’s since married. He needed to find a new role, so the couple quickly renovated the home and rented it out before flying to Australia to find jobs. Two years of hard work and saving meant he was able to come back to Christchurch in 2012, aged 28. He was ready to buy a property or two and fix them up for a profit. As-is bargains Bennett returned home to a market in disarray. Damaged properties bordering red zones were on the market ‘as is, where is’. The owners had collected the insurance and didn’t want to spend it rebuilding or repairing. Homeowners didn’t often want those properties. Investors were nervous because they couldn’t know how extensive – or expensive – repairs would need to be. But many were in a perfectly rentable condition and Bennett was confident he could repair the damage. The first property he bought was in Wainoni. He paid NZ$95,000 for the three-bedroom 1960s bungalow. He rented it out for NZ$550 a week, fully furnished.
Encouraged by the numbers, Bennett and his wife did a flyer drop around the east side of the city and they were inundated with calls.
significantly. This has let the couple to take a few overseas holidays in South-East Asia and buy an ‘as is, where is’ lifestyle block in Marshlands.
“Vendors saw me as an easy way out and just wanted to move on.”
However, he’s found that problems with tenants have taken a lot of the fun out of being a landlord.
In 2014, he bought 13 properties, although the difficulty of borrowing money against damaged buildings caused him problems. Bennett managed to get offshore insurers to cover the houses, at a high price, which helped placate the banks. That, plus ongoing repairs, allowed him to keep buying up ‘as is, where is’ properties at outstanding prices until 2016, peaking at 70 residential rentals and a 50-room rest home. More competition By 2016, other builders and investors had jumped into the market, generating competition and driving up prices. In addition, the 60 per cent loan-to-value ratio restriction came into force, which once again made borrowing a major hurdle. Since he stopped buying and consolidated, Bennett has paid down NZ$3 million in debt and fixed up most of his rentals. Having spent many years ‘asset rich, cash poor’, he’s managed to improve his cash flow
Tenants cause frustration Tenancy Tribunal hearings, rent arrears, and damage are continuing sources of frustration. He’s recently sold several homes, with another half-a-dozen “on the chopping block”. Hopefully that will cut down his stress levels. With the arrival of his first child, it makes more sense than ever. “Everything has changed around my son,” says Bennett. “My motivation has dropped down. “It is stressful, and I’ve had a lot of bad tenant stories; all the stories you can imagine. We’re trying to diversify: out of residential property, into the soon-to-be completed rest home, and into Harmoney. We’ve also sold multiple properties to our tenants under rent-to-own contracts and vendor financing. I’m simplifying for the future.” SPRING 2019
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Finding Good Tenants Finding the right tenant can make or break your residential property investment business. Here’s a guide to get you started. Once you’ve found a property to buy, the next step is to start the process of finding tenants. You’ll need to set the rent and make decisions on subjects such as rental agreements, pets, and flatmates.
3. The right tenant
1. Do your homework
Start with a well-written advert, paired with the best photos of your property, to appeal to the widest selection of tenants looking for a property.
Tip 1: Flatmates have more than one
At Crockers, we use a number of platforms to source tenants. We vet all new clients to give landlords the best possible chance of a hassle-free tenancy.
Tip 2: Each flatmate will be ‘jointly and
Crockers markets your property on multiple databases including our own popular website crockers.co.nz, OneRoof, realestate.co.nz, Trade Me, homes.co.nz, WeChat and SKYKIWI.
Tip 3: The tenancy agreement should
Setting the rent. Do you know how much rent you can expect? You only get a short window of time from listing to grab good tenants’ attention. It’s vital you set rent to meet the market while maximising your return. Too high and you’ll get very little interest and attract desperate tenants who often turn out to be a problem. Too low and you’re selling yourself short and may attract the wrong tenants. Tenancy Services keeps records from bonds of recent rental prices in each suburb. Data is split into lower, median and upper bands for different types of properties. However, these statistics include social housing, so sometimes they don’t reflect actual market rents. It’s important to regularly check the rental market to see what rental properties are being advertised for.
2. Should I allow pets? You’ll hear that many landlords don’t allow pets. The reason is our furry friends can damage walls, doors, floors, curtains, carpets or even dig up the back lawn. Yet tenants with pets offer landlords a huge opportunity. Tenants with pets have a lot of trouble finding tenancies. That means they’re often prepared to pay a little more rent for a property that allows pets.
You need to know what a good tenant looks like to find one. They may be very different people to you, but able to pay the rent and look after the property.
Sometimes excellent tenants are relocating to New Zealand and these tenants may not know about TradeMe or other local New Zealand websites.
4. What about flatmates? What about flatting situations and Work and Income clients? Landlords sometimes fear groups of flatmates. Yet the types of properties that appeal to groups often get the best rent. Not every property is suitable for a family and not every flatting situation is party central. Some groups of flatters may be better tenants than the wrong family. What’s more, a family might not want your property if it’s unfenced, on the main road, or backs onto a stream or railway line. Never say never, especially if you’re letting in an inner-city area. You might get some great young professionals. Likewise,
the right Work and Income clients can make excellent tenants. It’s all about knowing what to look for in a tenant.
income coming in between them to pay the rent, which is helpful should one lose his or her job. severally’ responsible for paying the rent, which can give landlords more security. specify the number of occupants to a property so you don’t end up with three to a bedroom, which can degrade a property quickly.
5. Fixed or periodic tenancy? Under the Residential Tenancies Act (1986) you can offer either fixed or periodic tenancies. With a fixed-term tenancy, tenants sign up to stay for six months or another set period. During a fixed-term tenancy, you can’t simply give the tenant notice to leave. Fixed-term tenancies are popular with landlords but can prove to be a doubleedged sword. With a periodic tenancy, there’s no set time a tenant must stay, and they can give 21 days’ notice at any time. The advantage of a fixed-term tenancy is that you won’t be looking for tenants again in a few months’ time. Landlords must give 90 days’ notice if they want the tenant to leave. This can
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THE INSIDER’S GUIDE
be done at any time during a periodic tenancy. One exception is if you, or one of the members of your family want to move in, you can give 42 days’ written notice to break a periodic tenancy. Be careful of this, because there are fish hooks. For example, companies and family trusts don’t have family members and can’t give this shorter notice. Fixed-term tenancies only need 21 days’ notice prior to the end of the tenancy to terminate. Tenants who breach the terms of their periodic or fixed-term tenancies can be removed from the property. To do this, they must be issued with a 14-day breach notice, with time to remedy the situation, and then a Tenancy Tribunal application is made for possession of the property if the issue isn’t resolved. A fixed tenancy rolls over into periodic at
the end of the term unless you re-secure the tenancy within the correct time frame. A good property manager will make sure the negotiations are done in time, giving the landlord peace of mind.
6. Vet the tenant Every tenant should be vetted. How they sell themselves and how they behave as tenants can be different. Vetting starts at the viewing. Look at what they are wearing, how tidy their car is, and whether they talk to you. Property managers learn very quickly which tenants will be suitable and know the tricks to look out for – such as old landlords giving glowing references to get rid of a bad tenant. Crockers runs credit and employment checks on every prospective tenant. You can never be too careful when it comes to letting an asset worth hundreds of thousands or even millions of dollars.
Tip 1 Be careful not to undersell your property.
Tip 2 Seek advice from a professional property manager who knows what properties rent for in your suburb.
Every tenant should be vetted. How they sell themselves and how they behave as tenants can be different.
At Crockers, we can tell you what properties like yours are renting for right now. Call one of our experts on 0800 2762 5377, or go to www.crockers.co.nz
YO U R I N V E S T I N G
Rent or Buy: What’s Cheaper? Should we all aspire to buy our own homes? Long term, the benefits of owning your own home far outweigh renting, says property commentator Ashley Church.
The details differ, but the broad thrust of the argument is always more or less the same. If you compare the cost of renting to the costs associated with owning a home, like the mortgage, rates, insurance, and maintenance, it’s cheaper to rent. If you look at the question purely in terms of your circumstances today – yes, that position is correct. If you compare the cost of buying a house today to the cost of renting one, and you ignore what happens to rent and house values over time, you’re better off renting in dollar terms. The costs of owning a home would almost certainly be higher than the cost of renting a similar property. But when you step back and factor time into your comparison, that position collapses. Home ownership wins hands-down, because there are light-years of difference between what happens to renters and what happens to home-owners over a lifetime. Here are some of the reasons why. Capital growth Over the past 40 years, the median value of homes in Auckland has increased by roughly 70 to 100 per cent every 10 years. This means that an Auckland home that cost NZ$50,000 to buy in 1980, would be worth around NZ$800,000 in 2019. The numbers aren’t exact and, as you’d expect, there are exceptions. Also, increases aren’t as dramatic in other parts of New Zealand – but as a general rule, the principle is sound. This is because of the property cycle. This shows Kiwi property values increased for five or six years out of every 10 years in each of the decades between 1980 and now. They stayed flat for the other four or five years in each of those decades.
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We’re now in the flat part of the property cycle in Auckland – and heading into it in other parts of the country – but the expectation is that we’ll enter a new round of house price increases in the early 2020s. To be fair, there’s no guarantee this will happen. But based on the evidence we can see over the past 40 years, you’d be brave to bet against it. A fixed house price The cost of paying back a mortgage can change over time. Rates and insurance premiums can increase – and interest rates can go up and down. But the price you paid for that house is ‘fixed’ from the day you take possession of it. Assuming you bought the house in my example for NZ$50,000 in 1980 – that’s what you would repay, plus interest, over the life of your mortgage. That’s even though the house itself had increased in value to NZ$800,000 by 2019. The cost of renting Sadly, the story for a renter over the same period is not so good. The median cost of renting a three or four-bedroom home has increased from NZ$175 in 1999 to NZ$525 today. Regular rent increases are a reality of renting, and there’s no reason to believe this will change. The power of equity As the value of your home increases, over time this builds equity. You have the ability to use that additional ‘equity’ to fund the things that are important to you, at a much lower interest rate than other forms of credit. Many Kiwis use their equity to borrow to buy businesses, pay for holidays, fund their children’s education, buy ‘toys’ like cars and boats, and
Headshot photo: Ted Baghurst/NZME
Every so often, I see a media article on the virtues of renting a home, rather than buying one.
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purchase baches and investment property. The only way a renter can achieve these things is to save up, or to borrow at much higher interest rates. Freedom in retirement Having a mortgage-free home in retirement can give you incredible freedom. Those who own a mortgage-free home typically slash between a third and a half of their household costs in their golden years. Those who rent are destined to keep paying for their accommodation for the rest of their lives, using money they could otherwise use to enjoy retirement. Paying hundreds of dollars each week in rent, when you may not have any income coming in, can make a big difference to your financial situation. The short-term gain of saving a few dollars by renting, rather than paying a mortgage, is a momentary illusion. Over the lifetime of a New Zealander, the advantages of buying are immeasurably greater. Every Kiwi should aspire to buy their own home as soon as possible.
Definitions Capital growth: The increase in value of your house over time. This is usually measured by the difference in the current market value, versus what you paid for your house at the time you bought. Equity: Equity in your home is the difference between the market value of your home, and the amount you owe on your mortgage. One example is if you complete renovations, then get the home revalued at a higher market value, you’ll get an increase in equity. Another example is paying down your mortgage faster to free up equity. You can usually use this equity to borrow against.
For example, you could use your equity to get another mortgage to buy a rental property. Interest rate: The interest rate on a mortgage is the amount the lender (such as the bank) charges for the loan, expressed as a percentage of the total amount borrowed. If the borrower is viewed as low risk, they may be charged a lower interest rate. Household rates: Rates are a tax charged annually by local councils to help cover the services the community receives. Rates vary from place to place, and usually cover things like rubbish collection, running events and services, and maintaining public transport.
Ashley Church is the former chief executive of the Property Institute of New Zealand and the Auckland Property Investors Association. He’s been a regular media commentator on property for more than 20 years and now writes on behalf of OneRoof.
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The Homestead Bay ‘open-space’ site, will feature approximately 155 new freehold homes, architecturally-designed to suit their Alpine surrounds and bringing a neighbourhood feel to the bay.
Homestead Bay a ‘slice of heaven’ in Queenstown Queenstown’s renowned as one of the most attractive destinations in the world, and for those looking to call Queenstown ‘home’, the appeal of this Alpine paradise is clear. Discerning buyers from around the globe are looking for luxury properties offering the ultimate exclusive hideaway. Even in Queenstown, sites with 360-degree lake and mountain views, all-day sun, highly desirable lifestyle blocks, and a tranquil lakeside location are hard to find. That’s why Homestead Bay is special. Nestled between The Remarkables mountain range and Lake Wakatipu, it’s the last lakefront development of its kind, with an unrestricted kilometre of glorious lake frontage. This north-facing development spreads over natural land terraces in a bucolic setting, once part of the historic Remarkables Station. Carefully-designed integrated sites suit the widest range of lifestyle and business needs. Homestead Bay Peaks features 12 high-value lots in a stunning location. Lot sizes of up to 2.49 hectares deliver the ultimate in privacy and just four remain for sale.
A major drawcard for Homestead Bay residents will be Homestead Bay Marina. This sunny, sheltered spot will be perfect for launching and docking residents and visitors’ boats, enabling easy access to more remote areas of Lake Wakatipu. There will also be a future ferry service connecting Homestead Bay to the wider Queenstown region.
Homestead Bay Village The village will be a destination in its own right, with appealing tourism, shopping and recreational activities. Multi-award-winning architects Mason & Wales have imbued it with a European-style lakeside village ‘feel’, including a hotel designed to be a considerable drawcard for leisure and conference visitors. It will also be home to up to 400 apartments, bringing the convenience of stylish city-style living to this bucolic countryside setting. They’ll be an easy stroll to the retail precinct with its bustling waterside restaurants, bars and cafés, and like all Homestead Bay homes will have unbelievable lake or mountain views (or both!) Expressions of interest are welcome on all stages of the Homestead Bay development. Please visit www.homesteadbayqtn.com
ADVERTORIAL
Property Academy Part One: How to use your home to buy a rental Andrew Nicol, of Opes Partners, explains how to release the dead money locked inside your family home.
Are you sitting on a goldmine? Many Kiwis are sitting on a goldmine, and not digging. It’s sitting right there in plain sight. It’s our homes. According to the Real Estate Institute of New Zealand, the median house price in New Zealand increased by NZ$160,000 over the last five years. For many, this has created ‘equity’ in our homes. Equity is the difference between the market value of your property and what you owe on your home loan. Left untapped, this equity is dead money. It sits in your home getting zero per cent return. Here’s a way to unlock this dead money and put it to work, by investing in property. It’s called ‘leverage’.
Use the power of leverage Leverage is where you use a little bit of your own wealth, a deposit, to secure a larger loan from a bank. As a homeowner, you may be able to unlock this dead money in your home to secure the deposit for an investment property. You then use that deposit to get a larger loan from another bank to buy an investment property. Because you own this new asset, you’ll get all of the extra equity that gets created as the property increases in value, even though you’ve bought this property with no cash and 100 per cent borrowed money.
Here's how it works Let’s take the average NZ home, which five years ago was worth NZ$425,000. Let’s say when you bought it, you had a mortgage of NZ$340,000 (80 per cent). To keep it simple, let’s say you haven’t paid down any of that mortgage. Over those five years, the value of the average NZ property has gone up to NZ$585,000 (about 6.6 per cent a year on average).
Equity is the difference between the market value of your property and what you owe on your home loan.
Now you have NZ$245,000 worth of equity in your home. NZ$160,000 of that is dead money. Unlock that equity by taking out a loan of NZ$160,000 against your house, and you
may be able to get another loan of up to NZ$640,000 from a different bank. This gives you purchasing power of up NZ$800,000 to invest in property. In this way, you can invest in property without needing to save a deposit. And you can get a return on that dead money. The Average NZ Property created at least $160,000 of useable Equity over the last 5 years.
$585K
$425K
Equity
$340K
2014
Buying a house worth $500,000 You might decide to buy a property for NZ$500,000. To be safe, let’s say the growth in property prices might slow to 5 per cent growth a year. With your new investment property of NZ$500,000 increasing at 5 per cent a year, in the first year you could make NZ$25,000 from dead money of NZ$100,000. That means instead of earning zero per cent return each year, you’re getting 25 per cent in the first year.
Go to www.opespartners.co.nz to book a free session on how to become a property investor. Smarter Financial Decisions, Together.
2019
$500K
PROPERTY
$400K
Quiz
$100K Equity Your Bank
Summary
Bank #2
1. The average Kiwi home is worth how much more today than it was five years ago?
The bank
NZ$160,000
Your tenants
NZ$100,000
You
NZ$25,000
Your investment Property
Leveraging your existing home can be an easy way to get into property. It can help you to start getting a return from the dead money within your home.
4. Who gets the extra equity your investment property earns?
2. What creates equity in your home?
5. The bank likes you to keep how much equity in your home as a safety buffer?
Increased rates
40%
Your house increasing in value over time
50% 20%
Landscaping
But everyone’s different and buying a second property might not be the best idea for everyone. See a financial adviser and property expert to see if this works with your financial situation, level of risk, and goals. In New Zealand, different areas have property markets that work in different ways. Do your research.
3. Which is the only asset class where the bank gives you money to buy an asset, then someone else pays the cost of borrowing? Shares
So, if you sit on a gold mine but don’t dig, what happens? You guessed it – nothing. Look what happens if you dig.
Property
Try the free Opes Property Academy online course, www.propertyschool.co.nz.
Managed funds
Quiz answers: 1. NZ$160,000 2. Your house increasing overtime. 3. Property 4. You 5. 20%
5
How much can you commit to investing Just Released: in a lump sum, or each pay day?
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In this free course, Andrew Nicol – the author of this article – teaches you all the concepts you need to successfully invest in property. The course includes: 15 videos, 5 mini–tests, 3 calculators and 2 quizzes.
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Build Smart in Central Otago Queenstown’s unaffordability is in the headlines. But the wider region still has plenty to offer investors, with housing shortages creating demand, says Andy Lawrence, of Landmark Homes Central Otago. Queenstown’s one of the most popular spots to live in New Zealand, and it’s also a destination location for holidaymakers. But is it still a great place for investors? With high property prices, is it still worth buying and building in the area? We say definitely yes. The regions are popular Queenstown’s popularity is expanding to the regions, with Cromwell, Bannockburn and Alexandra all taking off. Where you buy land and build really depends on your budget. But because there’s such an accommodation shortage, tenants are willing to commute – sometimes the time they might travel in places like Auckland. So, don’t be afraid to head out into the outlying areas to buy land for your build. Wanaka is expanding, with many new subdivisions, and house and land packages are popular. They get snapped up super-fast so it’s always worth expressing your interest early. In Oturehua and Ida Valley, both east of Queenstown, lots of holiday homes are popping up. Who wouldn’t want to take a break in this stunning area? Most of the South Island is experiencing growth. Dunedin’s a good example of this, where property prices have increased by 18 per cent over the past year, says CoreLogic.
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There’s no longer just two seasons Gone are the days when people came to Queenstown either for winters up the mountain, or enjoying summers on a boat on the lake. No doubt these are still the most popular seasons. But increased popularity with overseas tourists and an increase in year-round activities in the area means there are limited down periods. Seasonal workers have turned into year-long workers, and there’s plenty of action in the shoulder seasons. Outdoor adventure, nature, festivals, and wine and food remain key reasons to visit. Queenstown has positioned itself as a year-round destination for Kiwis and those overseas, with something to offer everyone. What’s the current market? The steep curve of property price growth has flattened in Queenstown, but there’s still growth and plenty of opportunities. The demand for seasonal workers is consistent, and there are staff shortages in the hospitality, building and construction industries. This makes accommodation in hot demand, opening opportunities for investors and residents. Housing shortages drive up the price for rentals. We’ve seen people add an extra wing or unit onto their existing property, which means it can house more people and may generate more rental income. Showing potential rental income can be very attractive to banks. There are still plenty of capital gains to be made. Increasing land prices might be pricing some out, but there are
always options – investors just need to get creative. Gone are the days of a NZ$50,000 section. But there are attractive land and house packages which keep the spend within a clear budget. There are also still plenty of rural areas where land prices are not as high. Do your research, and think outside the square. Make sure your finances stack up, and that you can handle any market dips. Popular design features There are so many ways to maximise your property in Central Otago. • Materials. Embrace the natural beauty of the region with natural products. These are hugely popular, from schist to cedar. Sticking to natural tones keeps your property in line with the landscape, and helps it fit its surroundings. • Indoor and outdoor living. When you’re building, keep in mind that Queenstown is a year-round holiday destination. Having good heating and drying areas for ski gear is a good idea, and also outdoor space to enjoy in the summer sun. Good insulation and heating are key – no one wants a freezing cold holiday home. Low-maintenance outdoor areas are popular. • Design and size. Three bedrooms are popular because they suit families and also work for friends sharing a house, popular with seasonal workers. Most prefer open plan layouts inside, but the external styling can vary slightly in the Otago subregions – from marine (to match the water) to alpine, to contemporary.
Landmark Homes, Central Otago 03 443 2012 andy@landmarkhomes.co.nz
Why Landmark? Landmark Homes has more than 40 years’ experience of building exceptionally designed, fabulously liveable homes throughout New Zealand. Landmark is 100 per cent locally owned and operated, in 15 regions. Bringing your vision to life is one of our core beliefs. We offer clear options – including designing a bespoke home, recreating floor plans with your own touch, or developing an existing site. We work with a handful of talented and capable designers and architects to design a home that works for you. From your first point of contact with the Landmark Homes team, you’ll be expertly guided through the stages of building your home to ensure it’s exactly how you imagined it – with no hidden surprises. Landmark Homes is a longstanding member of the Registered Master Builders, so homeowners receive a 10-year Masterbuild Guarantee on every home the company builds. The first step is always to make contact. Feel free to ring Trish or Rudy, at the Queenstown/Wanaka office for a chat to look at the options for building your own Landmark investment home – or a residential option for yourself. There’s no better time to get the ball rolling than now.
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It can be tough for first-home buyers in the current market. House prices are at an all-time high after a boom, and for some young people, getting together a deposit can be hard. That’s why many people look to their parents as an option.
The Bank of Mum and Dad As more and more young people look to their parents to front up with the money to get them into their first home, Claire Connell discovers there are pros and cons.
Many experts, without shame, suggest in columns that young people ask ‘The Bank of Mum and Dad’ for help with finance. Yes, it can be the most generous bank in New Zealand, with low, or no, lending criteria. But should children be asking? Some parents are feeling pressured into giving money, even when they can’t afford it, at a time when they’re already worried about how they’ll live in retirement. And children are coming to expect a handout. It can get messy, too. Parents can get caught out when children can’t meet the repayments. And what happens when your child’s marriage ends and they split from their partner? Will the ex still benefit from the parents’ money? If you’re a parent or guardian looking at ways to help a child into their first home, we’ve researched the pros and cons of giving them money.
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Why it’s good for parents You’d be helping It’s normal for parents or guardians to want to help their children get a head start in life. By helping them into their first home, however you do it, you’ll be offering practical help. You might feel that you’re getting a good income now, and have savings to spare, so you’d have money (or equity) to offer. There could be financial benefits Maybe it will work for you, too. If you invest in the property or buy into a house alongside your child, then you’ll get the benefit of any capital gain, especially in areas with strong demand. You might view buying another home as an investment, which also gives your child somewhere to live. Your child may be living in it short-term, but for you it could be a long-term investment opportunity. Your child might leave home! Many parents, especially those in Auckland, face years with an adult child living at home, because flatting can be expensive. But, if you were looking forward to enjoying your empty nest and they just won’t leave, helping them into a house could be one way to get your space back.
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Being a guarantor means you’re legally locked into covering the mortgage. And your home could be sold to recover the debt. Where will you live then?
It can be practical At some point, your children will probably inherit a family home which, for many Baby Boomers, will be mortgage-free. You may feel that it’s more practical giving money earlier, when your child really needs it, rather than making them wait for an inheritance that might not come for years. And people are living longer, so your children may have to wait until they’re in their 60s before you die.
Why it’s bad for parents It could all go sour If you sign on as a guarantor for your child’s mortgage, your own money is at risk. If your child isn’t meeting the mortgage repayments, you’ll get a knock on the door from the bank. Being a guarantor means you’re legally locked into covering the mortgage. And your home could be sold to recover the debt. Where will you live then? Breaking up is never easy If you give money to your child and their partner, what happens if they break up? Your ‘ex-in-law’ could get half of your kind gesture. Likewise, if you invest in the property
alongside your children, what happens if one party wants to sell? What if your child doesn’t look after the home? Less money for you If you front up with $50,000 for your child’s first-home deposit, that’s $50,000 less for you to spend in retirement. If you’re a Baby Boomer, you’ll have less time to make up that money gap. And if you’ve retired with no passive income, you’ll never make it up.
I still want to help If you’ve decided to help out one or more children into their first homes, there are some important things to think about. Discuss all the scenarios Financial expert Mary Holm says you should ask everyone involved to sit around a table together and outline all the worst-case scenarios. Death and relationship break-ups are the main risks, Holm says. Write down a solution or outcome for every scenario – including if the child can’t pay the money back. Financial adviser Lisa Dudson says: “Treat it like a formal business situation.” Keep things open and honest Mary Holm says while your best intention
might be to keep this fair between all the children, in reality this may not happen. One child may have a disability, or just bad luck in life, or maybe they’re a young, single parent and need extra support. “Get all the kids together and see how everyone feels about you giving money to one. The others might be fine with it. But if one child is just being careless, the others might not be.” Holm says if children find out later that money was given in secret, it can tear families apart. “There’s nothing that divides a family like the feeling that kids are being treated unequally.” Take it seriously Helping out is a big deal, and can have a big impact on your finances. Think carefully before agreeing to dish out cash. Be practical and don’t let emotion get in the way, or feel pressure from either your kids or other parents in your social circle. Avoid borrowing or going into debt in order to help. Make sure your child knows the seriousness of taking on a 30-year mortgage. There are options They are many ways to help. You can be a guarantor on the home loan, gift money to SPRING 2019
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your child, give them a low-interest or nointerest loan, or buy the property together.
incomes, and aren’t paying much, or any, board, they may be better off than you.
Different methods have pros and cons, so check out the details. Be clear if your money is a gift or a loan, and if or when you expect the money paid back.
“How hard is it for two people to save NZ$80,000 over a few years for a deposit, if they really knuckle down? Are they really hard done by?” Dudson says.
Holm says: “People know their kids, but the trouble is people want to think the best of their kids, too.”
She says when her parents bought a house, interest rates were close to 20 per cent, compared to 4 per cent now.
Speak to experts Talk to a financial adviser about the options that are best for you. Retirement is ‘your time’ after years of hard work, so make sure you’ll have enough money left to enjoy it. Prepare for the worst-case scenario – what if your child can’t pay the money back? Get legal advice. Make sure any arrangement is signed off with a lawyer, and isn’t just a discussion over a few drinks. Are you really helping? Dudson says you should ask yourself if helping sends the right message. If your children are living at home, on good
“I think we’re a bit too quick to say, ‘Oh, it’s so hard for young Johnny these days to get into the housing market’. I’m not quite sure I buy that.” The wider impact Holm says there are bigger and bigger gaps between the haves and have-nots in New Zealand, backed up by research. Many parents could never afford to help. “People who help their kids are increasing that inequality – that’s a worry. I appreciate that individual families probably aren’t going to think, ‘Well, I won’t lend to my kids because of this growing inequality’ – but it is there.”
And we’ve got some tips for the kids . . . If you’re thinking of buying your first home, but a deposit is out of reach, you might be thinking about getting outside help. Here are some tips: Avoid asking Lisa Dudson says kids shouldn’t approach the subject with any expectations, or ask family members outright for money for a house. Avoid any sense of entitlement about money you may feel you’re ‘owed’. Have a reasonable and fair discussion with your parents if you’re stuck, and see what, if anything, eventuates. Step up Do your homework. Have you been saving hard? Have you done the maths on a mortgage? Being able to prove to your parents – and the bank! – that you’re already on your way to having a decent chunk of deposit can give you more credibility. Think of the bigger picture Think hard about what that money means for your parents’ retirement. They’ve worked hard for that money, and you’ll likely want them to have a stress-free remainder of their life.
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If you borrow the money, are you definitely going to be able to pay it back? Don’t get caught up in the hype There’s so much talk about first homes, it’s easy to think a house should be your main, or perhaps only, financial goal. Perhaps all your friends are buying their first homes, and you’re feeling left out. Kiwis love property and, yes, many times it makes sense to buy your first home as soon as you can. But the property market has changed a lot since your parents were young. Buying isn’t right for everyone, and you may not have the ability, or the desire, to sign up for a mortgage just yet. ‘No’ isn’t the end If your parents have enough money to even consider lending you some, you’re better off than most kids in New Zealand, whose parents may still be renting. If it’s not the right time for your parents, they can’t afford it, or there are other reasons involved, accept their decision. It might just be the motivation you need to save even harder to reach your goals.
Kiwi parents willing to help More than half of Kiwi parents say they would loan money interestfree to their kids for their first home, says a survey of 1,000 people by Westpac NZ.
55%
of parents would be prepared to gift their children money, 21 per cent would offer them an interest payable loan, and 18 per cent say they’d be likely to buy them a property outright
38%
of parents would expect the money to be fully repaid
53%
would likely act as a guarantor on their children’s first home, but 45 per cent of first-home buyers say they would refuse that offer
64% of respondents say they’d feel bad about having to ask their parents for help
ADVERTORIAL
How Unlisted Property Funds Work Are you looking to add commercial property to your portfolio? Rich Lyons, of Oyster Property Group, explains how unlisted commercial property funds work, and why they attract investors. A property fund can give investors access to large-scale commercial properties they wouldn’t be able to afford on their own. What are the benefits? Most investors are interested in unlisted property funds as they offer stable returns paid monthly, plus there’s the potential for long-term capital gains. The upfront investment is also a relatively low entry point, compared to buying a commercial property yourself, and potentially having to manage it. Investors get monthly returns, which is rent paid by the tenants. This creates a steady stream of income that can supplement an investor’s lifestyle or, in some cases, be reinvested to compound returns. Unlisted property funds offer a more regular income stream than share marketlisted funds, which typically pay dividends every six months.
Some investors are put off listed property investments by the volatility of the share market, because share prices can fluctuate due to investor sentiment or broader economic events, even if the underlying property investment is stable and performing well. Unlisted property funds are less exposed to market events and public sentiment, and the value of the investment is usually more closely aligned with the performance of the investment. How much can I invest? The Oyster Direct Property Fund (DPF), has a minimum entry investment of NZ$10,000. Oyster Management Limited is the issuer of the units. It is an open-ended structure, so the fund can continue to issue units and buy new properties on an ongoing basis. After the minimum entry amount of NZ$10,000, investors can continue to invest in multiples of NZ$1,000. This fund structure provides investors with a diversified portfolio of properties where there is no fixed term of investment, meaning the fund remains open with no definite end date. In addition, Oyster also provides other investment options for those looking to invest NZ$50,000 or more, typically single or dual asset unlisted funds.
How can you get your money out? If an investor decides they want to withdraw their investment from, for instance, Oyster’s DPF, the fund allows investors to cash in units monthly during the life of the fund. Other unlisted property funds normally require a ‘matching’ process where a willing buyer is matched with a seller, and they agree a price for the unit. In the case of the Oyster Direct Property Fund, there is no matching process when an investor chooses to exit their investment. The fund uses cash reserves to buy units back from investors at the current unit price. Liquidity in other funds comes down to the strength and effectiveness of the secondary market. At Oyster, we believe the ability to exit an investment is important, so a reliable and easy-to-understand secondary market is important. Last year, it took on average three days for Oyster to find a matching buyer and seller. The funds are normally distributed at the end of the month or on a date agreed between both parties. • To learn more about Oyster Direct
Property Fund, and to get a copy of the Product Disclosure Statement, please visit oystergroup.co.nz/direct-property-fund
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Can Commercial Property Cure the Residential Hangover? Residential property used to be the champagne of the investment world, but now it’s leaving a sour taste in the mouth, says James Group managing director Blair James. He suggests looking at the commercial world, to see if it suits you. The party is well and truly over for the residential property sector. Now comes the hangover. As people realise this, I’m finding there’s a growing curiosity about the options that lie beyond the classic Kiwi dream of home ownership. Industrial property doesn’t feature on the radar of most Kiwi investors. Maybe they’re not familiar with it and they don’t understand how these assets perform. They worry about higher deposits, and some have heard it’s risky. But I believe it’s a great option that can generate strong returns. Here are 10 reasons why you should look again at investing in commercial and industrial property. 1. Rent your dream home and invest instead For many Kiwis, the cost of living in a main centre with a hefty mortgage is no longer feasible. There’s an increasing gap between the cost of owning a home
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that’s close to work, schools, cafés and eateries – and the cost of renting it. Many people now rent at a fraction of the cost of mortgage payments. Instead, they’re exploring commercial property investments to see an immediate cash-on-cash return. 2. Help the country’s bottom line Owning your own piece of the commercial market might mean you’re providing a launch pad for the next Kiwi start-up to take the world by storm. At the very least, you’re keeping industry local, to help grow our economy. The government has just released NZ$300 million from the 2019 budget to support the venture capital market, meaning more start-ups will need premises – and soon. 3. Record-low interest rates The net yields of commercial property (say 6 per cent), compared to record-low lending rates on offer (between 4 and 5 per cent) mean this asset class goes a long way to servicing any finance on the
property – and it certainly beats leaving your money in the bank. 4. Tenants pay your operating expenses Unlike residential property, as well as paying the annual net rent, your tenant pays your operating expenses. This includes council rates, insurance, compliance costs and general maintenance. The tenant even pays for property management, which means your day-to-day property needs are met by an industry professional and paid for by the tenant. 5. More skin in the game from tenants Residential landlords can only charge a maximum bond of four weeks’ rent. But there are no restrictions on what a commercial landlord can ask from their tenants to secure the lease. They could ask for: • Bank guarantees for up to 12 months’ rent • Advanced rent payment structures • Personal guarantees
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• Substantial rental bonds (three to six months’ rent). 6. Longer lease terms With residential property, your income is secured only for short terms – periodic tenancy agreements (42 days) and fixedterm tenancy agreements (usually six to 12 months). With commercial property, two years is considered the start point, and they can extend past 12. 7. Low maintenance Some people worry that managing a commercial building’s upkeep is daunting compared to a three-bedroom house. But an industrial property is just four walls, a roof, a roller door, and a simple office, essentially a skeleton version of a house. Factor in a property manager and a maintenance schedule and it may be not as daunting. 8. No advantage now for residential letting fees Until late 2018, residential landlords could
recover letting fees from their tenants. Now the landlord picks up the cost to lease a space in both commercial and residential property. You should allow for two months’ gross rent to cover these expenses.
industrial property syndicates can be a viable way of overcoming these barriers to entry. As little as NZ$50,000 is required to generate a 6 per cent cash-on-cash yield spread across a portfolio of commercial and industrial property.
9. They’re not making any more of it
If you have savings, or are looking to move an investment, get in touch with the team at James Group to see if securing a piece of the commercial and industrial property market is right for you.
“Buy land – they’re not making any more of it,” Mark Twain said more than a century ago, and it’s still true today. Land for commercial and industrial use is growing increasingly scarce. When the Auckland Unitary Plan came into effect, there was estimated to be just seven years’ worth of suitably zoned land to sustain the current levels of growth in the industrial property sector in Auckland. As commercially zoned land becomes scarcer, demand will drive prices up. 10. Overcoming the financial barriers to entry As a general rule, property investors need to stump up between 30 and 35 per cent equity to buy a property. Commercial and
The information contained in this document is provided on a best-endeavours basis and is not intended to form any professional advice or opinion including, but not limited to, legal or financial advice or any legal or financial opinion on any particular matter. Before entering into any contractual document, James Group Limited recommends that you seek legal, technical and any other advice or information, and that you have either obtained that advice or information, have included a provision in any relevant agreement or other contract to obtain that advice or information, or have decided not to do so, on your own accord.
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The CoreLogic Property Report
Investors are Back in the Market Small investors have increased their market share, and big investors are buying again in Auckland. CoreLogic’s New Zealand Head of Country Ben Speedy explains what’s happening.
Our CoreLogic data is showing a trend where small investors – those with two properties – are getting back into the market. Our figures also show that bigger investors are in the market again in Auckland. It’s a small shift so far, but it could mean the worm has turned. We found last year that people with their own house and one rental or bach were hit hard by loan-to-value ratio rule changes. We saw their market share of property purchases hit a lull of less than 10 per cent in mid-2018 and stay there. But now that percentage has bumped back up to 11 per cent. It’s a small shift so far, but we’ll be keeping an eye on it. I think the main factor for this change will have been the scrapping of the proposed capital gains (CGT) tax back in April. Smaller investors may have felt most concerned about a CGT, so they’re more likely to have received the largest boost to confidence now it’s off the table. It’s still not an ‘easy’ landscape for investors, because investors are facing other costs. Among them are higher insulation standards and the tax ring-fence for losses now in force. This is all happening at a time when gross yields are still low.
Residential investor finance remains constrained, given that the speed limit for investor lending is low, at only 5 per cent of lending allowed to be at a loan-to-value ratio of greater than 70 per cent. However, rents are now outpacing price growth in parts of the country, so yields are beginning to rise. And alternative investments like term deposits are hardly that enticing. It’s hard to say whether investors are competing against first-home buyers for lower value properties, due to limited data on the unsuccessful bidders of each property. First-home buyers and mortgaged investors are neck and neck on market share of property purchases – at 24 per cent. So, I think it’s fair to assume that competition between buyers will generally tend to be first-home buyers versus investors. First-home buyers and investors have come back into the market at the expense of ‘movers’, people with their own homes who are choosing to renovate, rather than move. I wouldn’t say the investor market is back to normal yet, but there are signs of revival, which will become stronger as yields rise. • Download the full report at www.corelogic.co.nz
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How New Zealand fared
Auckland -2.7% Tauranga +6.3%
Hamilton +4.7% This graph shows the annual change in property values in major cities over the year ending June 30.
Wellington +7.9%
Christchurch +1.0%
Dunedin +12.2%
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Property Investing Without the Fuss New compliance costs may make property investing not worth the hassle. So how can you still invest in property, hands-free? New Zealand investors have had a love affair with owning and investing in property. Whole industries have evolved around property investing. Educational courses, management companies and property clubs have popped up, some costing thousands a year. But some investors may start to ask whether being a landlord in today’s increasing regulatory climate is the best investment strategy. Why take on that hassle when there is an alternative? You could invest instead with Southern Cross Partners. Look at the latest round of regulations landlords have to act on. New Healthy Homes Standards (HHS) became compulsory on 1 July. The standards set minimum requirements for heating, 66 JUNO |
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insulation, ventilation, moisture, drainage, and draught-stopping in rental properties. Landlords now have to keep records showing they’ve met the standards. Deadlines for Healthy Homes Standards • 1 July 2021: Private landlords need to ensure their rental property complies with the standards within 90 days of a tenancy, whether new or renewed. All boarding houses have to comply with them by this date. • 1 July 2023: Housing New Zealand houses and Community Housing providers need to comply with the standards by this date. Note, they get two more years than regular rentals. • 1 July 2024: Every rental home has to comply with the standards.
What does this mean? For landlords, this means one word – expenses! There’ll be financial pressure on residential landlords to make sure their houses comply with the set minimum standards. Landlords will likely pass this cost onto their tenants through increased rent. As the rentals deal gets harder, will some investors exit the market? If they do, how can they use property as an investment tool without being a landlord? The answer is peer-to-peer investing. This is where Southern Cross Partners comes in. Get money from property without owning one Property-backed peer-to-peer investing has risen in popularity since Southern
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Cross Partners was licensed by the Financial Markets Authority in December 2016. Many property investors still want to be involved in property, but don’t want the hassles of bad tenants, ongoing maintenance, or the inevitable call about the plumbing at 2am in the morning. Step away from the work Many of our investors have had extensive investment portfolios. They’re now at a stage in their life where they are thinking more about travel and lifestyle, rather than maintenance and tenants. They understand that a bricks and mortar approach to investing, having something solid supporting the investment, could give them peace of mind. Traditional ownership of an investment property can give access to possible capital gains, but could also result in capital losses. With property-backed peer-to-peer investments, you won’t get capital gains, but you should get a regular
monthly income, which most investors tell us is important to them.
Market may incur a fee. See our website for more details.
Every investment has risks and peer-topeer investing is no different. It’s important to understand the risks associated with any investment product.
Most of our investments are paid monthly. On occasion there may be a compounding investment available to choose.
In short, peer-to-peer lending, supported by a first mortgage, offers you fee-free monthly payments without the hassle of maintenance or compliance. Sounds like a good deal.
3. Do I have to manage the loan I’m investing in? No, you don’t. Our role is to manage all aspects of the loan, including collecting and distributing interest, chasing any arrears through to enforcement action. There’s nothing you need to do but enjoy the returns.
Frequently asked questions 1. Can I still choose the type of property I’m investing in? Yes. Our online website offers a live list of investments backed by a first mortgage over an individual property. An investor’s money is invested in the specific property they choose. 2. When do I get my returns and what fees will I pay? There are no application fees, ongoing management fees, or account fees. Exiting an investment early via our Secondary
LIFE DOESN’T WAIT, NEITHER SHOULD YOUR INVESTMENTS.
Disclaimer: Southern Cross Partners is a licenced peer-to-peer lender under the Financial Markets Conduct Act 2013. To learn more about the risks associated with this type of investment visit our website, www.southerncrosspartners.co.nz. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser before making any investment decisions.
Returns from 6.25% to 8%* Sometimes it can be hard to balance the need to save for your future, as well as enjoying the adventures that pop up every day. Our unique investment model offers you the flexibility to do both. At Southern Cross Partners, we offer mortgage secured loans that allow investors to pick and choose their level of involvement. With returns of 6.25% - 8%* paid out monthly, you’ll know you’re making the most of your savings and can make the most of life at the same time. Talk to us today about a new, flexible way to invest. Phone 0800 00 58 43 www.southerncrosspartners.co.nz
* Investment rate subject to change. Southern Cross Partners Ltd is a licensed Peer to Peer lender under the Financial Markets Conduct Act 2013.
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Is Now a Good Time to Buy? With prices stable in Auckland, there are benefits to buying and selling in the same market, says Bindi Norwell, chief executive of the Real Estate Institute of New Zealand.
Auckland’s median housing price sat at NZ$850,000 in June – the same price as May this year, and the same price as June 2018. This has prompted questions whether it’s a good time to buy residential property in Auckland. In May this year, the Reserve Bank of New Zealand cut the Official Cash Rate to a record-low 1.5 per cent. Almost immediately, some of the major retail banks announced they’d follow and cut their mortgage and term deposit rates. It was then cut to 1 per cent in August. First-timers rejoice The announcement was good news for people who’ve been looking to get onto the property market for some time, like first-home buyers. Mortgage payments are now likely to be more ‘affordable’ than they’ve ever been. For those with floating mortgages, it’s a chance to pay off their mortgage slightly faster – if they leave their mortgage payments the same. The banks are naturally taking a careful approach to lending. This is welcome, because in the coming years interest rates are likely to rise. No one would like to see a highly leveraged housing market, where people have borrowed to the maximum and may be unable to meet their home loan repayments.
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This means that, for the first time in a long time, many first-time buyers’ savings aren’t falling behind house price rises, so they can get a foot in the market. Compare that to buyers in Hawke’s Bay or Manawatu, who’ve seen double-digit annual growth rates for months. This makes it really hard for first-time buyers. Upsizers and downsizers More stable house prices in Auckland have also helped families upgrading their home to a larger one, or wanting to move to a different school zone. More people are buying and selling in the same market. They might not have got quite as much for their old home as they would have liked, but it meant that the step up to the next property is likely to be more affordable. They might even be able to afford a bigger home for their budget than they thought. For downsizers, it’s a similar story. Again, they might not get as much for their current property, but the property they’re looking to buy might be cheaper. The property investing market For residential property investors, the cost to entry is more affordable than it’s been in a number of years, and there are attractively low interest rates.
Moderate growth
Investors have to take into account new law changes affecting tax breaks, insulation, asbestos and methamphetamine.
Auckland region’s median house price has increased by a moderate 3 per cent over the past three years, to NZ$850,000.
If you’re hoping to buy, take your time, do your due diligence, visit open homes and get advice from legal and financial advisers.
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YO U R I N V E S T I N G
The Tax Party’s Over Property investors have enjoyed some tax perks in the past. But new rules are changing the way they’re taxed – and they’ll have to look at their portfolio differently now, says Mark Russell of PwC. Tax benefits used to be a key factor when Kiwis were buying residential property investments. They were a nice little sweetener that may give you an attractive bonus at the end of each tax year. But new tax rules that apply from this year onwards mean investors need to focus more on their pre-tax cash position when they’re working out just how attractive rental investments could be. The ‘good old days’ In the past, if you were considering buying a rental property, you’d sensibly factor in the favourable tax outcomes when you were thinking about the economics of your investment. The gains you might make when you sold a rental property were tax-free, in most cases. You could claim a tax deduction for a wide range of expenses. This often meant your bottom line showed an overall loss on the rental for tax purposes, and that loss could be offset
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against other sources of income, such as salary and wages. This gave you a refund of your pay-as-you-earn (PAYE) tax that helped fund your mortgage payments.
rental property in April 2018 that earns her NZ$30,000 a year in rent. She can claim tax-deductible expenses of NZ$40,000 against that income, which includes:
Turning tide
••
Two law changes affect the apparent tax benefits of rental properties.
••
1. Investors now cannot claim tax depreciation on residential rentals; and 2. You’re taxed on gains made from selling residential rental properties within five years of buying them, for properties bought from 31 March 2018 onwards (the ‘brightline’ rule). From 1 April 2019, important new tax rules come into force. This further reduces the tax benefits you can expect from rentals. Known as the ‘ring-fencing’ rules, these new laws stop you offsetting tax losses on rentals against other taxable income. Ring-fencing Here’s how it works. Kim bought a new
•• •• •• ••
the interest she pays the bank on her mortgage rates insurance property management costs repairs and maintenance costs accounting services.
This gives Kim an overall tax loss on the property of NZ$10,000. She also earns NZ$90,000 a year from her job. This puts her on the top personal marginal tax rate of 33 per cent. In the tax year to 31 March 2019, Kim could offset this NZ$10,000 rental tax loss against her salary. She’ll receive a tax refund of the PAYE her employer deducted over the year, of NZ$3,300. But now, with the new ring-fencing rules, Kim won’t get the tax refund. Instead,
PROPERTY
she’ll ‘carry forward’ the NZ$10,000 of excess deductions to future tax years.
NZ$50,000 gain, which she has to pay tax on because of the bright-line rule.
Using ring-fenced deductions
Kim can now use her remaining NZ$5,000 of excess deductions under the ring-fencing rules. She can offset it against profit she made on the sale of the property, so now her net taxable income is NZ$45,000.
Let’s say, in the year to 31 March 2021, Kim makes a profit from her rental property instead of a loss. She’s increased the rent she charges for the property, paid down some of her mortgage and decided to manage the property herself. The property also needed fewer repairs this year. She’s now making a nice NZ$5,000 taxable profit on the property for the year. She can now use that excess deduction of NZ$10,000 from 2020 against her taxable income for 2021. Kim won’t pay tax on her rental income for 2021 and she’s still got a further $5,000 of excess deductions left over to carry forward to 2022.
If, instead, Kim sold the property after the five-year bright-line period but still hadn’t used the $5,000 ring-fenced losses against rental income in that period, she’d continue to carry forward those losses. She can use them later, in any future tax year when she might find herself with overall taxable income from the home. But if Kim didn’t have any future residential property income, she’d never get the benefit of that $5,000 of ring-fenced losses she’d been carrying over.
Selling properties
Multiple properties
Let’s say, in 2022, Kim decides she’d like to sell the existing property and buy a new rental in another area. She makes a
Kim might buy two more rentals. Let’s say Property 1 is break-even, Property 2 makes a tax loss of NZ$3,000 and Property
3 makes a tax profit of NZ$10,000. Kim can offset the NZ$3,000 current loss and the carried-forward NZ$5,000 of ring-fenced deductions against the NZ$10,000 of profit she made, and she’ll have net taxable income of NZ$2,000. Focus on the fundamentals These new ring-fencing rules are important for anyone looking to buy a rental property. Investors should plan ahead and focus heavily on the pre-tax cash outcomes of any property: any losses, or profits.
Definition Bright-line rule: The bright-line rule means you’ll pay tax when you buy and sell a residential property, unless an exclusion applies. For more details on the two-year and five-year bright-line rule, visit www.tiny.cc/brightlineIRD
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Ask kids and teens what money is for, and you’ll get many answers. Where we need to get to is 'money is for growing’.
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Kids and the Money Tree What are we teaching the kids and teens in our lives? Sorted’s Tom Hartmann puts the spotlight on sustainable money lessons at home and in schools.
Imagine for a second that money did grow on trees, and that our personal finances were like a tree full of apples.
Studies show that children who are able to put things off for a greater reward later tend to be more successful in many areas of adult life.
Typically, in personal finance, too much of the conversation revolves around the apples, not the tree. We weigh up credit cards to see which will give us the best rewards, check which accounts pay the highest interest, look for the lowest-fee funds. We pick shares and track their ups and downs. But it’s really about growing the apple tree. It’s about sustainability. Personal finance needs to be about helping that money tree grow for the future. So, how do we teach our kids to have a focus on long-term growth and wellbeing? The new Sorted in Schools programme (sortedinschools.org.nz), run by the Commission for Financial Capability (CFFC), found a number of themes parents can use for inspiring lessons. Money is for growing Ask kids and teens what money is for, and you’ll get many answers. Where we need to get to is ‘money is for growing’. Or at least
a good part of it needs to be, because our needs tend to increase as we get older. Parents who are investors know this. There should be not just three, but four jam jars for pocket money: spending, saving, giving, and ‘growing’. It’s great if there’s money growing in the background over children’s entire lives. Since some money attitudes are already formed by the age of seven, parents are children’s first educators. When they ask you about your own ‘growing’ jar, you can point to your investments and the returns you might be getting. A sustainable rule of thumb ‘Spend less than you earn’ is a great place to start. In fact, I prefer ‘Earn more than you spend’. Yet just earning more or saving more isn’t really sustainable. You can still spend all you earn, save for the short term, or get into a cycle of saving, then spending it. After a few years, you’d have nothing to show for it – no growth.
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That’s why KiwiSaver and investing beyond KiwiSaver are so key – these are the money trees. So are education, building a business, and many others. Let them get the idea How do we equip young Kiwis for a financial future we can’t guess? Money and investing may change, but the principles of managing money will stay the same. That’s the message of the Sorted in Schools programme – it’s the concepts that count. The first lesson you can start with is delayed gratification – learning that even your spending money doesn’t have to be spent all at once. Studies show that children who are able to put things off for a greater reward later tend to be more successful in many areas of adult life. Getting kids into saving and investing early, through investments like KiwiSaver, is much like that – it’s about making good choices now that will bear fruit far into their future.
Keeping the long-term view The second important lesson is ‘opportunity cost’, or how spending on something today always involves some sort of trade-off with tomorrow, a future good. Investors know about the effects of compound interest over time. Money can snowball because your interest is earning interest. That future good is worth waiting for. This is what investing is all about. The point in not spending now is to take advantage of the potential we have to grow our investments over time. We need a surplus in our budget so we can save or invest to get to a better position. Now, that’s sustainable. Our kids need to know how to manage their money so they can do the many things they’d like to in life. With parents’ help at home and Sorted in Schools at school, kids will head out into the world knowing how to make money work for them, and grow it. Just like a money tree.
Sorted’s Smart Investor What’s good? What’s not? With investing, it can be hard to tell. We all need context – a way to compare and tell if we’re getting results … or if we’re paying through the nose for nothing. Sorted’s Smart Investor platform, smartinvestor.sorted.org.nz, lets investors compare the mountain of data on investments. It covers managed funds, KiwiSaver, share and other equity offers, bonds and other debt securities, and other managed investments. The data comes from financial service providers, but you can find it all in one place. Smart Investor was built by MBIE, the CFFC and the Financial Markets Authority.
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YO U R I N V E S T I N G
From Popsicles to Prime Minister Prime Minister Jacinda Ardern says she was taught about saving in her childhood and believes all Kiwi kids need to learn about money. Eleanor Black finds out why.
Prime Minister Jacinda Ardern looks back fondly on her childhood: the days of the 20c popsicle and lycra, “a lot of lycra” she says with a laugh. A Generation X-er who grew up in the Waikato in the 80s and 90s, she already had a clear sense of political dramas playing out on the world stage, which helped shape her life’s mission. “Nuclear weapons and nuclear power were being debated, and war in the Middle East was real,” she says. Cleaning golf balls But the 39-year-old also remembers how simple those times were, at home in Morrinsville. Ardern worked in the local fish and chip shop, and collected and cleaned golf balls to earn pocket money. Her father Ross was a police officer and detective, and is now Administrator of Tokelau. Mother Laurell, who worked in the school canteen, taught her the value of money young. Ardern appreciated early on how hard it could be to earn money – and to grow it. There were lean times, especially when she was a student at the University of Waikato, where she studied communications, politics, and public relations. “My relationship with money has changed over time,” she says. 76 JUNO |
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Student life
Kids and money
“My mum and dad taught me to be careful – to save and always budget carefully. But there were times as a student that it was tough.”
Recalling her own upbringing, Ardern says she’s keen to see Kiwi kids exposed to more education around money and the financial system.
After graduating, she was an MP for nearly 10 years, earning a good salary, before taking over as prime minister in 2017. Now she brings in more than NZ$470,000 a year, making her one of the highest-paid world leaders.
“My hope is that we will do a much better job of teaching financial literacy in schools over the coming years.
“Now, I’m in an incredibly privileged position, including financially,” she says. “That means I have a duty of care and responsibility to all those who are not.” The housing market Ardern and her fiancé Clarke Gayford did enter the booming Auckland property market, buying a small brick-and-tile house in Point Chevalier, Auckland. They sold it in April last year for NZ$1.32 million. This was NZ$333,000 more than they paid for it, but below the area’s median price, according to CoreLogic data. They upgraded to a four-bedroom 1920s bungalow in Sandringham, Auckland, just before the arrival of their daughter Neve, now 1. When the PM’s in Wellington, she stays in Premier House, the official residence of NZ prime ministers.
“Right from when I was a child, my mum used to teach me to save my pocket money so I could buy my friends or my sister Louise a birthday present, or if I needed clothes… “I’ve always been focused on family, friends and the kind of work that feels like I am making a difference. I know that makes me lucky.” On track for retirement Asked if she’s on track for retirement, Ardern says with a laugh, “That’s the kind of question that makes a politician worry about their future!” But seriously, yes, she is a dedicated saver and she advises all Kiwis to join KiwiSaver, to help set them up for their later years. “The world is changing so quickly that I think we all need to plan ahead and do what we can, so we’re as prepared as possible for whatever the next decade and beyond brings.”
“The world is changing so quickly that I think we all need to plan ahead and do what we can, so we’re as prepared as possible for whatever the next decade and beyond brings.”
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The Two Lives of Tara When Tara boosted contributions into her KiwiSaver account to 10 per cent, her future started to look a lot brighter, says Paul Gregory, of Pie Funds and the JUNO KiwiSaver Scheme.
Saving and investing are like most things in life. The more you put in, the more you can get out. Think of your KiwiSaver goal as a water tank. The more you put in yourself, the less you rely on other sources, like rain, or irregular returns. That’s good, because you can expect rain over longer periods. But you can’t know exactly when – and you can’t guarantee it’ll rain when you need it. It’s the same with investing. If you want regular, high returns to get to your KiwiSaver goal, you usually have to take more risk. That means investing in assets like shares, which can deliver you high returns – but you could get big drops, too. If you put in more money, you’ll be relying less on returns. This means you can choose funds within KiwiSaver that have investments with less risk. You may also pay less in fees for this. That’s like reducing water leaking from your tank. It’s easy to increase your contribution by asking your employer. Recent changes mean you can make higher regular contributions – up to 10 per cent of your salary or wages. So, let’s look at the difference contributing more could make to your KiwiSaver goals. Meet Tara and her KiwiSaver goals Tara’s 30, and earns NZ$70,000 a year. She wants to buy a home in 10 years. Then she wants to retire when she gets to 65. We’ve looked at Tara’s future if she puts 3 per cent contributions into her KiwiSaver account, versus if she puts in 10 per cent contributions.
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For our calculations, Tara pays the highest tax on her investments, at 28 per cent Prescribed Investor Rate (PIR) tax. We used the Sorted KiwiSaver Savings Calculator to work out what Tara’s two lives might look like. You can use it yourself at www.sorted.org.nz Tara’s first home We’ve chosen a balanced fund for Tara because, with a 10-year horizon, she’s probably best to take slightly less risk. If Tara makes the minimum 3 per cent contribution every fortnight, the calculator says she could save NZ$45,243 in 10 years. But if she contributes 10 per cent, she could save a whopping $100,460. This makes a big difference to Tara’s choices. She could maybe have a bigger house, the same house with a smaller mortgage, or she might be able to buy in a better area. Most of the difference is because she’s putting in more money. Contributing more means the dollar value of your investment returns is higher, but that’s dwarfed by her 10 per cent contribution being more than triple the size of a 3 per cent contribution. Tara’s retirement When it comes to Tara saving for retirement, we can really see the impact of her increasing her contributions. If Tara joins KiwiSaver at age 30 she will have a zero balance. She’s got a while until retirement, so we’ll start her in a growth fund. After 25 years she’ll move her money into a balanced fund for the last 10 years. With a 3 per cent contribution, Tara could have NZ$382,072 by the time she’s 65.
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But with a 10 per cent contribution, it could be NZ$857,755. The 3 per cent contribution will give Tara NZ$184 a week to live on in retirement, on top of New Zealand Superannuation, until her life expectancy of 94, the average for a Kiwi woman. The 10 per cent contribution gives Tara more than double the 3 per cent amount: NZ$414 a week on top of NZ Super. That gives her a lot more choices once she stops working. When you have more money in your KiwiSaver account, compounding returns can help fast-track your savings. You usually make returns on your KiwiSaver balance over the long term. These returns then gets added to your initial balance, which increases your balance, and then you have more money to make returns on. Compounding returns can really help supercharge your KiwiSaver balance.
don’t have time to recover from the losses. You can’t predict when markets will go down, but you can try to insulate yourself from the worst impact of nasty surprises. Do this by choosing the right fund. The more time between now and your goal, the more time you have to recover from losses, and the more risk you can take. For longer time periods, a growth fund can be a good choice. But if you need your money sooner, you might want to take less risk. The more moderate your goal, the more likely you are to achieve it over shorter time periods, too. A balanced or conservative fund might be better for you. As Tara did, you can start with a higher-risk fund and then change to a lower-risk one as you get closer to your goal. If you’re unsure of what fund you should be in, or what your risk tolerance is, speak to your KiwiSaver provider or a financial adviser.
Hold that thought Sometimes increasing your contributions isn’t the right thing to do. Contributing 10 per cent of your income to KiwiSaver can have big results in the future, but it has equally significant results in the present. With more money taken out of your salary, you’ll have less money to live on. Can you afford to put 10 per cent in? Do the maths and work out a budget to see if it suits your situation. Your money’s locked into KiwiSaver, so you can’t withdraw it, unless it’s for your first home or retirement, although significant hardship claims are sometimes accepted. Life can throw a lot of unexpected things at us, not all of them good. Things like redundancy, sickness, the death of a partner or a relationship split can have a big impact on your finances. And you might have debt like credit cards, a student loan, or mortgages. Before you increase your KiwiSaver contribution as high as 10 per cent, tackle high-interest debt first like credit cards. Have a lump sum set aside for the unexpected, often called emergency savings. The risks Your money in KiwiSaver is invested in the financial markets. This means the balance can go up and down, depending on how the markets behave. There’s a risk that your balance might go down in value at the wrong time, when you 80 JUNO |
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TAR A’ S RETIREMENT
Definitions Compounding returns: Compounding returns help supercharge your savings. You earn returns on your KiwiSaver balance. Those returns get added to your initial balance, meaning you’ve got a larger balance to make returns on. KiwiSaver contributions: When you sign up to KiwiSaver, you can start contributing directly through your salary or wages. You can choose to contribute 3%, 4%, 6%, 8%, or 10% of your salary. Prescribed Investor Rate (PIR): Your PIR determines the tax you pay on the returns from your KiwiSaver investment. The rate of tax you pay is based on your income. PIR is 10.5%, 17.5%, or 28%. Risk: All investments, including KiwiSaver, come with risk. Risk means the likelihood of losses when the markets dip. Choose the right fund that matches the risk level that’s best for you. Paul Gregory is the Group Head of Investments at Pie Funds Management Limited. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read the Product Disclosure Statement at junokiwisaver.co.nz. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. It does not constitute financial advice. We recommend you speak with a financial adviser.
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Our PIR Problem News earlier this year saying about 1.5 million Kiwis were on the wrong tax rate for their investments led to lots of confusion. Claire Connell explains how to check you’re on the right PIR.
Around 1.5 million Kiwis are on the wrong tax rate, or PIR (Prescribed Investor Rate) for their investments, says the IRD. This includes 550,000 people who paid too little tax on their investments, including many KiwiSaver accounts. These people have to repay the tax they owe. More concerningly, there were also 950,000 people who paid too much tax. This money is not refunded by IRD. The amount overpaid totalled NZ$42 million. Many people aren’t aware that their tax rate for KiwiSaver and other investments changes with their income.
pay on the returns from your KiwiSaver investment. The rate of tax you pay is based on your income over the past two years. If the two years work out to be different rates, pick the lower PIR for this year. PIRs are 10.5, 17.5 or 28 per cent. How often do I need to check PIR? It’s a good idea to check your PIR every March, towards the end of the financial year. If your income has gone up or down, you might be on the wrong PIR.
Many people were confused about what a PIR is, and what they need to check.
For example, if you’ve had a pay rise, reduced your hours, started a job that pays you less than before, or been on, or about to take maternity leave, your PIR may have changed.
What is a PIR? Your PIR determines the tax you will
How do I find out what my PIR is now? If you log into your KiwiSaver account, you
In either of the last two income years was your taxable income $14,000 or less and your total income (including PIE income) $48,000 or less?
YES Your PIR is 10.5%
NO
In either of the last two income years, was your taxable income $48,000 or less and your total income (including PIE income) $70,000 or less?
YES Your PIR is 17.5%
should be able to see your PIR on file. If you’re on the wrong rate, you might be able to change it yourself within your KiwiSaver account portal. Otherwise, contact your provider, or the IRD. If you have other investments, such as managed funds, check with that company too. But it’s not all bad The good news is that IRD says its staff has started contacting customers who are on an incorrect PIR. New legislation also means that from 1 April 2020, IRD is able to notify a KiwiSaver provider if someone is on the wrong PIR. These two measures, plus an increase in education around PIR from media coverage, should mean more Kiwis are on the correct PIR. This will hopefully mean there are fewer people who overpay tax they can never get back. If you’re in doubt about your PIR, check it out. For more information, visit the IRD’s PIR web page: tinyurl.com/pirird
NO
In all other cases
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How to be a Carbon Trader Carbon credits are becoming an asset class of their own, says Nigel Brunel, of OMF, in the third of our Financial Markets series. You may not have heard much about them lately, but they’re still going strong. Carbon credits were a hot topic when the government first launched the Emissions Trading Scheme (ETS) 11 years ago, but there hasn’t been much talk about them since. Their price started out high, then dropped dramatically when poor-quality overseas carbon credits swamped the market in the middle of the Global Financial Crisis (GFC). But gradually they’ve built in value again. Carbon credits are a feel-good investment that can help New Zealand meet its climate change commitments. What’s a carbon credit? A carbon credit is a unit you can buy and sell that offsets pollution. Offsetting one tonne of carbon means there will be one tonne less carbon dioxide in the atmosphere. The printing press for carbon credits within the ETS in New Zealand is forests. Trees absorb and store carbon dioxide, making them a great tool for beating climate change. Pollution in the atmosphere can be offset by growing more trees. The ETS is New Zealand’s central 82 JUNO |
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mechanism for meeting its international obligations under the Kyoto Protocol, soon to be replaced by the Paris Agreement, starting in 2021. It’s a politically created market, effectively a market-based tax.
just grew trees. They’d plant a forest and around 28 years later, they’d chop it down and sell the wood. Now, by planting a forest, they can earn carbon annually for the life of the forest.
It’s a cycle. Forest owners earn carbon credits every year for their trees and sell them to emitters. Polluters buy one carbon credit unit to give them the right to produce one tonne of emissions. Emitters hand the units back to the government to offset their emissions.
Some forest owners plant permanent forests, which will never be harvested and will remain a sink forest for carbon.
For example, companies like fuel supplier Z Energy are a ‘point of obligation’. That means Z Energy has to offset our emissions because we’re buying petrol from it to fill up our cars. We pay for Z Energy’s carbon through the fuel price. Z Energy will buy carbon credits and hand those to the government. How it started Countries who signed the UN’s Kyoto Protocol committed to reducing greenhouse gases. There are two ways to work this obligation into your economy, a carbon tax, or an ETS. New Zealand chose an ETS, which is fast becoming the global model for dealing with emissions domestically. New Zealand has one of the world’s oldest emissions trading schemes, set up by Labour in 2008 and continued by the incoming National government. Forests are the key Most large emitters don’t invest in a forest directly and choose to buy carbon credits instead. Before the Kyoto Protocol, forest owners
With the price of carbon now at NZ$23 to NZ$25 dollars a tonne, that can be an attractive option for a landowner. How can you invest in carbon? There are several ways to invest in carbon. 1. If you’re a rural landowner, you could set aside some land for growing trees for carbon. 2. If you don’t already own land, you might buy a rural lot, plant a forest, and just hold the carbon credits. 3. You could buy carbon credits and speculate they could go up in value. In 2012, units were around NZ$1.45 a tonne. But recently they rose to NZ$25.70. As of 1 August, they were at NZ$23. The price of carbon is expected to rise over the next five to 10 years as the Paris Agreement kicks in. 4. You could invest in an Exchange Traded Fund (ETF), which can be bought and sold on the stock exchange. Salt Fund recently launched a carbon ETF on the New Zealand Stock Exchange. It holds New Zealand carbon credits and can also hold foreign carbon credits. If you invest in it, you’re effectively buying into the carbon price. The benefit of having carbon as part of your investment portfolio is that carbon is not correlated to other markets like shares.
PERSONAL FINANCE
FORESTS
CARBON CREDITS
GOVERNMENT
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We need more trees New Zealand’s committed to reduce our emissions 30 per cent on 2005 levels by 2030. We can probably only meet about half of that domestically. We’ll have to buy the rest as carbon credits from international markets. That’s because half our emissions come from agriculture and we are at 85 per cent renewable electricity generation already. There’s not a lot New Zealand can do domestically to meets its 2030 Paris commitment. Our goal is to plant a lot more trees, but that’s really just a stopgap as we transition to a low-carbon economy. New Zealand’s goal is to be at net zero by 2050 for carbon emissions. Agriculture’s our biggest challenge. Demand for carbon credits The Paris Agreement comes into effect in 2021. It’s committed to reduce emissions to 2 degrees above pre-industrial levels, or ideally 1.5 degrees above, by 2030. Current
contributions will lead to a world 3 degrees above pre-industrial levels, so there’s a lot of work to do. International experts believe carbon prices need to rise to between US$75 and US$125 a tonne by 2030 to drive companies to find new clean technologies. When the price of carbon gets higher, and less carbon is used, the price of carbon credits could eventually fall to zero. I believe it won’t happen in our lifetime, so it’s probably not a bad investment over the next 40 years. Air NZ has to pay Air New Zealand has a ‘point of obligation’ under the emissions trading scheme because of the greenhouse gas emissions of its aircraft. The airline is required to buy carbon credits and give them to the government, as it is one of the country’s largest climate polluters. The airline’s doing what it’s required to do by law. But if you feel guilty about your air miles, when you fly, you can do more.
Just check a box to pay extra for your carbon credits, to offset your fuel use. Air New Zealand uses that money for its FlyNeutral programme of carbon emission reduction projects. Nigel Brunel is the Director of Institutional Commodities at OMF. He’s been involved in the New Zealand carbon market since its inception in 2008. For more information, see www.omf.co.nz.
Definitions Emissions Trading Scheme (ETS): The ETS puts a price on greenhouse gas emissions. Companies buy units to offset their emissions. Kyoto Protocol: An agreement signed by 55 countries. The Kyoto Protocol committed developed countries to greenhouse gas emissions reduction targets.
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ADVERTORIAL
Losing your income for a prolonged period is a possibility for many. Let’s look at what that same lender might consider reasonable for the same family with only one working parent. A parent on their own would qualify only for a mortgage of around NZ$280,000. The monthly repayments would be around NZ$1,750 in today’s rates.
When Big Mortgages Go Bad When your household income drops, but your mortgage repayments don’t, you’ll wish you’d planned ahead, says Naomi Ballantyne of Partners Life. It’s no secret that house prices across the country have been growing at an increasingly rapid rate over recent years. Whatever the reason, this has had all sorts of knock-on effects on household expenses and lifestyle decisions for Kiwis of all ages. Mortgages are getting bigger The sums can be scary. A mum and dad with two kids who are earning NZ$75,000 each before tax can generally qualify for a mortgage of around NZ$785,000 on a 25-year term. That would cost them around NZ$4,900 per month in repayments at today’s rates. Many people live with this level of debt. Effectively, this is the repayment amount the lender calculates that the family can manage, while also paying for all their other normal household costs. That’s fine when both partners are working. But what if one gets sick and can’t work for a long period? Overnight, their family income may be halved, while their mortgage repayments and their other household expenses stay the same. People get sick at any age Working people can and do get seriously sick. Every day, we see lives disrupted by cancers, strokes, heart attacks, and a multitude of other health issues, at any age.
The lender calculates that the family can now only afford about 36 per cent of their existing NZ$4,900 mortgage commitments. This means the other 64 per cent of the mortgage repayments can be expected to make a significant dent to the family’s ability to pay for their other usual living expenses. Drastic measures Your first option would likely be ACC, or perhaps your employer might help. Failing that, there are three main other options. • Reduce the mortgage by selling assets, such as the house • Reduce normal household expenses by curbing your current lifestyle • Replace the missing income to ensure the ongoing mortgage repayments and normal household costs can be met. Replacing the lost income might mean the healthy parent takes on overtime or an extra job in addition to caring for the kids. Or perhaps they take on boarders who pay rent, or family may be able to help out. Some people try to crowd-fund through a platform like Givealittle, or a friend might hold a fundraiser. Insurance may help If people have risk insurances in place, they could claim against that insurance to replace the lost income, giving them time to regroup while the other partner recovers. After all, this is happening at exactly the time when all the attention should be on helping mum or dad recover and, hopefully, get family life back to normal as quickly as possible. In my opinion, if you as parents are willing to risk borrowing NZ$785,000 to make a home for your family, you surely must be willing to buy risk insurances. If you qualify for a payout, insurance can likely help you keep living in that home and help pay your normal household costs, even when one of you is too ill to work. What do you think? Note: Just be sure before you sign up for mortgage cover insurance, that you read all the fine print, and know exactly what you’re insured for. Some illnesses, accidents and pre-existing conditions may be excluded, so make sure you read up about those too.
Working people can and do get seriously sick. Every day, we see lives disrupted by cancers, strokes, heart attacks, and a multitude of other health issues, at any age.
PERSONAL FINANCE
How Do Kiwis Rate in the Super Stakes? We all dream of a comfortable and happy retirement, but a look at superannuation rates around the world shows what NZ pays retirees could be better. Brenda Ward looks at the latest findings.
New Zealanders on superannuation are paid a smaller proportion of the average wage than many OECD countries – and we’re getting less than half of the average wage before tax. That’s far behind the top three countries in the Organization for Economic Co-operation and Development, which all give their pensioners more than 100 per cent of a working wage when they retire. In fact, in the top country, Croatia, retirees get a whopping 129 per cent of a working wage – more than if they were actually working at the average wage. India (99 per cent), Portugal (95 per cent), and Italy (93 per cent) also have pension rates higher than the average wage. New Zealand’s rate languishes 11th from the bottom of the 65 countries, followed by Australia, 10th from the bottom. What we get For single people, the after-tax NZ superannuation rate is set at around 40 per cent of the ‘average ordinary time wage’ after tax, which this year works out at NZ$24,721.84 gross a year, paid at NZ$950.84 a fortnight before tax. Many people accustomed to life on the average wage when they worked will find they face a shortfall to live at the same standard after retiring.
This is creating a demographic change worldwide. Across the OECD, more older people are staying at work. The World Economic Forum (WEF) found about half of people older than 65 work part-time on average over those countries. It could be worse At the other end of the scale, you wouldn’t want to be retiring in the UK. Pensioners there get a pretty raw deal, the worst of any OECD country, says the WEF. They get just 29 per cent of a working wage when they retire. Compare that to the OECD average of 63 per cent, or the average for its EU neighbours of 71 per cent. In the United States, the pension rate is 49 per cent of a working wage. In China, the rate is 83 per cent, OECD data shows. In New Zealand, NZ Super isn’t means-tested, which means everyone gets it who qualifies, regardless of how much they have in savings or assets. This isn’t the case in, for example, Portugal or Australia. Crisis ahead Meanwhile, we’re living longer. The World Bank has found that retirees in the six countries with the largest pension systems are living between eight and 11 years longer than they did in 1960 – and longevity is still going up. SPRING 2019
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That creates big stresses on countries’ economies, says the WEF, which called it a ticking time bomb. “The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change,” says Michael Drexler, of the WEF. NZ Super set at 65 New Zealand is holding its retirement age at 65, but the age when you get a pension is going up in about one-third of OECD countries. And in Denmark, Finland, Italy, the Netherlands, Portugal and the Slovak Republic, your age to get it will be linked to the country’s average life expectancy. In 2017, the UK government suggested the state pension age will rise to 68 between 2037 and 2039. Three countries already have future retirement ages that are over 68 years: Denmark, Italy and the Netherlands. 88 JUNO |
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What to do about it Some Kiwis say they can live on NZ Super payments alone, but many will find themselves with a shortfall to get the retirement lifestyle they want. You can take steps now to help you reach an income you feel comfortable with in retirement. You could:
contribute to KiwiSaver. Not many countries in the OECD study have the equivalent of KiwiSaver. • Invest your nest egg in a managed fund or in your KiwiSaver account, where your fees will probably be less, rather than leaving it in the bank.
• See a financial adviser who can help set you on track for your goals. A financial adviser can help determine which investment types suit your personal situation.
• Work fulltime for longer than age 65 and invest your NZ Super, which may help make it last longer.
• Start saving now. The earlier you start saving, the greater your KiwiSaver balance could be at retirement. And remember the government and your employer
• Downsize your home to clear your mortgage and invest any money remaining after you’ve bought your new house (provided it was cheaper!)
• Work part-time in retirement to supplement your savings.
PERSONAL FINANCE
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YO U R I N V E S T I N G
Business Vision Kiwi companies are coming up with some innovative solutions. Claire Connell showcases some that are working smarter to bring you business that inspires.
The platform Miuwi, set up by Brad Parsonson and Nicola Valentine, aims to make home ownership achievable.
New Gin Raises the Bar Diana Miller loved gin, but wanted to cut down her intake. She found there was a lack of sophisticated adult alternatives.
Initially the pair thought the concept would appeal to cash-strapped millennials, vying for their first home. But since launching, they’ve found all types of other people keen on the setup too.
Tired of reaching for the same fizzy and sweet non-alcoholic drinks, she thought: why not make an alcohol-free gin?
Two or three friends, two sets of couples, and families have all registered with Miuwi for help with co-ownership. And if you can’t find someone to co-own with, Miuwi offers a ‘match maker’ service.
She and husband Will, a qualified distiller, started experimenting. In October 2018, Ecology & Co made their first commercial batch. “I think a lot of people are just looking for an alternative to a glass of alcohol, in social situations,” Miller says.
made by adding 10 individually distilled botanicals, and balancing the flavours.
“It’s not just people who quit [alcohol], a lot are trying to just cut back.”
As demand increases, the company’s looking to scale up production, which may bring the cost down.
Production is still boutique – one bottle of either the London Dry or Asian spice spirit takes two weeks to make in the distillery in Devonport, Auckland. The gin profile is
A House – and Avocado on Toast Two Kiwis have come up with an innovative idea to help people get on the property ladder if they’re a bit short of a deposit – co-own a house with others on a sharing platform.
Then you have access to their team of experts, including mortgage and insurance advisers. This provides a ‘one-stop shop’ for home ownership, Valentine says. It’s free at this stage for customers – Miuwi makes money through its partnerships.
But being a social enterprise, keeping it local is still top of mind.
But doesn’t sharing with strangers come with a tonne of risk?
www.ecologyandco.com
Miuwi’s co-ownership agreement, created with a legal partner, can help mitigate the risks, Valentine says. “It’s like a prenup that outlines steps that can be taken when things go wrong. You’ve always got that legal agreement to fall back on that states what happens.” There’s a third-party lawyer that can help as you go through those scenarios and, worst case, you’d sell the property. So far, Miuwi registrations of interest have equalled NZ$4.7 million in house deposit savings.
Solid Gold It all started when celebrities Britney Spears then Ashton Kutcher gave Kiwi company Ethique a shout-out on social media in 2016 for its plastic-free solid beauty bars.
lab as part of her science degree. Ethique’s now looking to raise capital to fund its international expansion and to hire more staff. But the company’s bigger measure of success isn’t to do with profit, West says.
Sales took off and now Ethique products are stocked in more than 14 countriees. All are fair trade, use naturally derived and sustainably-sourced ingredients, palm oil-free, and vegan. Sales grew 300 per cent over the last year.
Ethique has already prevented the manufacture and disposal of 3.5 million plastic bottles worldwide. The company’s goal is 50 million by 2025.
The business was founded by Brianne West, who started making the beauty bars in a 90 JUNO |
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Seven years into its journey, Ethique is still the world’s only full range ‘solid’ beauty brand. www.ethiqueworld.com
www.miuwi.com
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UNFILTERED Game-changer series with Jake Millar Five Minutes With Sir Bob Jones Property investor, businessman, author and former politician
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Sir Robert ‘Bob’ Jones is a property investor and New Zealand’s largest private office building owner, with company assets in excess of two billion dollars. He’s also an author and former politician. Born in 1939, Jones grew up in a state house in the Lower Hutt suburb of Naenae. He attended Naenae College, before studying at Victoria University of Wellington. In his early years he worked in factory jobs.
But in 1963, he bought his first commercial property. Today he’s New Zealand’s largest private office building owner, with 900 tenancies in Wellington, Auckland, Sydney, and Glasgow. He was knighted in the 1989 Queen’s Birthday Honours for services to business management and the community. Jones talked to well-known TV producer Julie Christie about his passion for buildings.
PERSONAL FINANCE
You’re New Zealand’s largest private office building owner, with assets of more than NZ$2 billion. But most people consider you a businessman.
You bought your first commercial building in 1963.
I’ve built plenty of buildings over the years for the hell of it.
You only spend about half an hour a week now on the business. How do you spend your time?
I immediately got hooked, and I loved cities. You’ve got to remember half the world’s population lives in cities. The projections are that 75 per cent will in another 30 years, and I don’t doubt that for a minute. And you see the effect in this country. You go into country towns. Is the city buggered or not? You just look – are there pretty girls in their 20s still there? And if you find them there, the city’s okay. You’ll find them in Dunedin, and so I think Dunedin’s going through a wonderful resurgence. You can feel it. It’s a marvellous city.
Reading. I play tennis, I play golf. We travel a lot. We’re always buying buildings abroad. And I love it.
Did you intend to grow Robert Jones Holdings?
So, the idea of building for you is in the main street of a vibrant city?
We have a lot of the critical buildings in the prime CBD of Wellington. We’ve got 17 of them. About a month ago, we were walking down Lambton Quay and I looked across the road to what used to be a long row of just dreary offices and quite wide pavement. Now it was a haven of activity, non-stop all the way along, and outdoor cafes. That’s because we bought those buildings and we broke that office space up into retail. And there’s just an endless demand for these food places, but it’s so lively and colourful.
At my age, it’s not about money. I hardly need that. But it’s about the sheer joy of it. Although I’ve only got four so far in Glasgow, inside two years we’ve developed a bit of a reputation, because we do to them what we do here.
It took me a while to work out the critical thing, and the critical thing was I wanted to be answerable to myself. I worked in heaps of factories, but never lasted long. I assembled cars, made biscuits at Griffin’s, worked in the Coca-Cola factory. The tedium of it all.
When you’re looking at a building, is the aesthetic beauty of it important? If it’s not there, we can usually do it. I get involved in that. There are a lot of things we can do to make a building better, and we do it. We’ve got $1 million of income coming in about every two days, but we spend it. We spend it on aesthetic things, because it’s basically a capital exercise. I know you dislike anyone who dares call you a property developer. I’ve built plenty of buildings over the years for the hell of it. It’s been a very interesting hobby over my life, and of course, two periods where it was the prime preoccupation. The older I get, the more interested I get. I enjoy having large offices. All my siblings have the same large homes. I guess it’s a by-product of living in a cramped state house.
What do you look for, other than location? We’re very concerned how our buildings look. We get a kick out of looking at them. I’m shocked at how horrible and how neglected our rivals’ buildings are. Even if you can’t see it, we will paint, say, our roof. We’ll do things like that, and just make them look better.
Do you believe you’ve either got it when it comes to business or commerce, or you haven’t got it?
You once said you retired at 24 and once you ran out of people to lunch with, you become very boring.
Everyone’s got it, if they want it. If there are tenants in there and I don’t have anything to do, I’ll try and intrude, and especially later in the day, [when] they might be having a few drinks. I’m really curious. Take coffee shop proprietors. I wonder, what do you do about these buggers that go in and sit there all day in prime seats? These sort of interesting issues; I want to hear about them.
I used to drag buggers out to play squash, because nobody else had retired. I was a bit of a pest, non-stop squash-playing, and dragging them off trout fishing. But everybody else had to work, so it didn’t turn out to be such a good idea? I always maintained an office, and I always made sure that everything was functioning,
because that’s why I was able to do things like the New Zealand Party, whimsical things. As long as I kept that base and kept watching that. And every now and again I’d buy another building, because it was interesting.
Three of them have listed facades, and behind, the brand-new buildings. But not like this terrible ‘facadism’ that goes on here, with a bloody great tower sticking out. When I was there a few months ago, we were busy steam-cleaning a building for the first time in 160 years, and it just looked fabulous. People do notice that we do this. How many will be enough for you? There will never be enough. I use the analogy of stamp collecting. A stamp collector doesn’t have his collection to sit and look at. He goes to exhibitions with the view to buying more. When you see other people, what things do they get wrong? I think with most folk in business, the money is not the motive. I think it’s the independence and they’re happy with that. They’re happy to have their coffee shop or whatever, without saying, “I’m going to start a chain of them.” Mistakes are never thinking things through clearly. *This interview was recorded as part of the Unfiltered Game-changer series. To see the full interview, go to www.unfiltered.tv.
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T R AV E L
Himalayan High Leave the hiking boots at home. On this private walking tour, it’s all about the little luxuries, writes Ute Junker.
In Sikkim, in northeastern India, you never know where a walk in the woods will take you. Follow one of the time-worn footways that criss-cross the area’s sub-tropical forests and you may find yourself in a leafy dell. Then on closer inspection, that shadow-dappled rock turns out to be a simple Hindu shrine decorated with ancient carvings. Or you may follow a path that leads you through lush cardamom fields – a cash crop for many of the area’s farmers – into a secluded village. There are simple but tidy houses, potted flowers brightening up every front porch. With its verdant slopes ringed by snowcovered peaks, the former mountain kingdom of Sikkim, which shares borders with Bhutan, Tibet and Nepal, is one of India’s most underrated destinations. In these remote mountains and valleys, roads are confined to a few main thoroughfares. Many of the locals get wherever they need to go on foot. That makes for great hiking territory, but you don’t have to be an experienced trekker to explore Sikkim. In fact, you don’t even have to own a pair of hiking boots. Indulgence plus adventure Boutique operator Shakti Himalaya’s tailored Sikkim walking tours are designed 94 JUNO |
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for people who don’t do rugged. Consisting of equal doses of adventure and indulgence, these private trips will take you off the beaten track while still delivering a steady supply of creature comforts. A decent pair of walking shoes is all you need. You won’t be sleeping in a tent, either. That’s not the Shakti way. Instead, you end each day by arriving at one of Shakti’s exclusive lodgings, village houses that have been repurposed as inviting retreats. Your bags will have been delivered before you arrive, and you and your companions will be the only guests. Step into your cosy room, kitted out with a king-size bed and heated by a wood-fired stove and, after a hot shower in your en-suite bathroom, you’ll wonder why all hiking experiences aren’t like this. Get amongst natural beauty Want to commune with nature? Your guide will ensure that your route includes plenty of the Himalaya’s natural wonders. You’ll be taken past stems of purple-stemmed bamboo, rhododendron trees laden with blossoms, and tiny sprays of wild orchids. On another day, you may stroll through one of the area’s astonishing chestnut forests, where the trees soar to dazzling heights, but the chestnuts themselves are smaller than your fingernail.
T R AV E L
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Want to mix it up with some culture alongside the nature? No problem. Your walk can be adjusted to include visits to village markets and traditional craft workshops, as well as monasteries where brightly coloured prayer flags wave gaily in the wind. The Himalaya is famously home to some unusual Buddhist sects. You might stop in at a shrine featuring unusual tantric images in which female forms twine around a seated Buddha figure. Local guides to help Shakti’s guides are all local, and are greeted by locals wherever they go. They’re happy to act as translators, allowing you to chat with the villagers. As the walks are tailored to your fitness level, you will never end the day feeling too tired. If you do start feeling weary at any stage, your guide can arrange for your driver to pick you up from the nearest road. Once you start walking, however, chances are you’ll want to keep going. This is not a rise-before-dawn trip. Mornings start with one of the staff bringing you tea or coffee in bed. Then downstairs, there will be a hearty feast waiting. 96 JUNO |
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Indian cuisine is showcased Meals are one of the highlights of a Shakti trip. Lunch is served al fresco. The most memorable feature of every lunch, however, is the view. Each lunch spot is selected for its outlook. It might offer a panoramic view of the valley below, or a front-and-centre look at the mighty Kanchenjunga, the third-highest peak in the world. A different Indian cuisine is showcased each night at dinner. The Sikkim trek is just one of three different hiking adventures offered by Shakti. Their all-inclusive itineraries also unfold in the
alpine forests of Kumaon and the high-altitude moonscapes of Ladakh. Like many guests, having done one trek, you may find yourself coming back for more. www.shaktihimalaya.com
PERSONAL FINANCE
Book Reviews Reviewed by Sarah Ell
Sold! How to buy and sell your home with real confidence
Starting Out, Starting Over: A single woman’s guide to money in New Zealand
By Nicole Jacobs Published by Hardie Grant, NZ$29.99
By Susan Edmunds Published by New Holland, NZ$39.99
Watching TV reality series The Block is a guilty pleasure for many of us. Some of us enjoy seeing – and commenting on – the interior design. Others are intrigued by the personal lives of the contestants. But at its heart, it’s about property. The New Zealand property market might be slow or falling, especially in cities such as Auckland, but Kiwis still love to think and talk about buying and selling houses. Nicole Jacobs is a regular on the Australian edition of The Block, teaching contestants what buyers want in a property. This expands on her day-to-day role as a buyer’s advocate. We don’t really see this role in New Zealand, but it’s taking hold over the ditch. As a job, Jacobs works closely with clients to help them find their dream property. She negotiates on their behalf, especially in auctions, so she’s well placed to write about the ins and outs of buying and selling. Some of this book is Australian-specific and covers rules and laws in various states, but overall its advice will come in handy here, too. For potential buyers, Sold! looks at how to research the market and do due diligence before making an offer on a home, with particular advice for first-home buyers. Jacobs also puts the case for using a buyer’s agent, pointing out that when you’re making such a big investment, it makes sense to ask the experts. Jacobs then looks at the selling process, and another option when you’re after a ‘new’ home, of renovating your existing one. You’ll find quotes and tips from other experts too. There’s plenty here to help anyone dealing in property, whether you’re a first-timer or a more experienced buyer in the market.
It’s an unfortunate fact that relationship breakdowns, separations and divorce can be particularly financially ruinous for women. Often, they’ve taken time out from their careers to raise children or support their partners, so they’re on the back foot when they find themselves on their own. Add to that the fact that in many industries, women are still paid less than men for doing the same jobs. The introduction to this information-packed book points out that women are constantly being told by society that they are ‘no good’ with money. Susan Edmunds, a business journalist for Stuff.co.nz, believes in empowering women with information and increased confidence to take charge of their financial futures, regardless of their relationship status. This comprehensive guide covers everything from goal setting and budgeting, to saving and getting rid of debt. As well as reducing the money going out, it also looks at increasing the amount coming in, with advice for starting businesses and ‘side hustles’ to generate extra cash.
Working people can and do get seriously sick. Every day, we see lives Edmunds offers advice for buying a house solo, insurances disrupted cancers, strokes, heart and planning forby retirement. Importantly, she also discusses how women can protect their assets when attacks, and a multitude of other they do get into a relationship, especially avoiding STDs (sexually transmitted debt!). issues, at any age. health The book’s friendly, accessible style backs up Edmunds’s assertion that anyone can be good with money. This book will be a useful guide for any woman on her own trying to negotiate the financial wilderness and take control of her finances.
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Kiwi Investors More Confident Confidence in New Zealand’s financial markets has been slowly growing, a new survey by the Financial Markets Authority shows. Gillian Boyes, the FMA’s Manager of Investor Capability, talks about the research.
Investors in managed funds and those who buy their own shares are more confident in New Zealand’s financial markets than KiwiSaver members, a new report for the Financial Markets Authority shows. And the trend over the past six years has been a gradual uptick in confidence in investing. A total 65 per cent of investors said they were confident in New Zealand’s financial markets. The main reasons were a rising economy and a better understanding of financial markets. There’s obviously been some ups and downs during the past six years, so that encourages us that people see the markets as a well-regulated place to put their money.
The survey found a big difference in confidence between the KiwiSaver investor (just 65 per cent were confident) and the managed fund or shares investor (85 or 84 per cent). Those invested in managed funds and shares tended to be older, were more likely to be male, were confident in financial markets, were confident in regulation, and aware of the work of the FMA. Those people tend to be a bit more ‘savvy’. Whereas for someone in KiwiSaver, that tended to be the only investment for 32 per cent of those who responded. This confidence gap is significant. There’s still a long way to go to help KiwiSaver members understand that it’s an investment and it’s for the long term, not like a bank savings product. We want providers to help their customers become better informed about their investment decisions. So, it’s good to see people are finding their investment materials more useful. In fact, 58 per cent agreed that product information was more useful this year and that’s been rising steadily while we continue to nudge providers to improve in this area.
The survey found 86 per cent of Kiwis over 18 have some form of investment. Most common are KiwiSaver (66 per cent), term deposits (34 per cent), shares (17 per cent), and managed funds and residential property (both 14 per cent). It’s well known that women tend to be less confident investors than men, and this is borne out by the results, where generally 56 per cent of women are confident compared to 68 per cent of men. While 12 per cent of males rate themselves as being very confident, only 5 per cent of females do. Significantly more females (23 per cent) are also likely to say that they’re unsure when referring to their confidence in the financial markets, compared to just 13 per cent of males. This is why a lot of our work in investor capability is focused on helping women build confidence about investing. www.fma.govt.nz Disclaimer: The FMA is contributing content as part of its objective to support well-informed investor decisionmaking and promote fair, efficient and transparent markets. This is not an endorsement of any provider or product.
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Going Up, Going Down Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.
Going down The economy’s slowing. Growth in gross domestic product (GDP) slowed to 2.5 per cent in the year to March and indicators point to 2 per cent by the end of June, though that of course is history. Looking ahead, signs are pointing to even slower growth for the rest of this year. That’s either an economy entering an under-performance stage, or the glass half-full interpretation of it, which is deferred achievement. The unemployment rate continues to fall, hitting 3.9 per cent, the lowest since June 2008. Wages are showing signs of moving up, in part driven by rises in the minimum wage. The labour market is a lagging indicator, but the strength should allay some concerns that the economy is fading rapidly.
It costs more to live Household living costs are up 1.5 per cent in the past year. But they were higher for some of us: • Living costs for beneficiaries and retirees rose 2.1 per cent. • Living costs for Maori households increased 1.8 per cent. Rising rents hit beneficiary and Maori households more, because they spend more of their income on rent than the average household. Retirees were affected more by rising insurance costs. 100 JUNO |
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Green for go It’s not one-way traffic. The economy’s still getting good support in some areas. We had more than 50,000 people migrate to New Zealand in the past year. And the construction sector has a huge pipeline of work. In the year to June, there was NZ$15 billion worth of building consents issued for homes, and NZ$7.4 billion of non-residential building consents.
MARKET INSIGHTS
Cut, cut, cut The Reserve Bank has cut the Official Cash Rate. That’s aimed at supporting the economy by making it cheaper to borrow and invest. Normally, it would also help lower the New Zealand dollar, which would be good for exporters. However, these are not normal times. Other countries are also cutting interest rates. The NZD/AUD rate is around 0.96. The Reserve Bank needs to cut interest rates to stop our currency from moving up.
Winter blues The housing market continues to slow, but it’s a split personality. Auckland’s house prices continued to underperform the broader market over the past year. Auckland down 3.7 per cent
Going up
Rest of NZ up 6.5 per cent
When growth is weak, the government can stimulate the economy by spending more and putting money into people’s pockets. That’s what it’s doing.
House prices nationwide have fallen 0.8 per cent in the past three months, led by Auckland (-1.7 per cent), with prices flat outside Auckland. The time it takes to sell a house is a reliable indicator of future price trends and it’s starting to rise. Will lower interest rates work their magic? It’s not obvious the market will reignite, given stretched affordability and banks tightening up on credit.
Government spending rose more than 8 per cent in the past year and is projected to increase more than 6 per cent over the coming year. But simply spending can be counterproductive. You need to be spending in the right places and getting value for money.
It’s a tough world
Disclaimer: While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. Data and information have been gathered from sources Bagrie Economics believes to be reliable. The content does not constitute advice.
Mind your business Business confidence is still weak, and it’s been negative for almost two years. Other gauges from business surveys are also giving tepid readings. Firms say they expect activity, investment and employment to stay low, which points to slow growth. The views of businesses matter. If they are cautious on hiring and investing then growth slows, which is what is occuring. SPRING 2019
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All data correct as at 6 August 2019
Why is the New Zealand economy slowing? The government is blaming the international environment. Global wobbles are affecting some sectors. Tourism numbers have backed off. Visitor guest nights have fallen. Forestry log prices have tumbled. However, the overall export picture looks okay. Exports are rising faster than the economy. The slowdown so far has been domestic driven. Watch out if the export sector slows as well.
Stocks On The Move Katharina Battenhausen, of Pie Funds, provides the backdrop to the rises and falls of four stocks on the New Zealand and Australian exchanges.
Up
SMALL CAP
LARGE CAP
Ecofibre Limited
Telix Pharmaceuticals Limited
(ASX:EOF)
(ASX:TLX)
Ecofibre makes and sells hemp products, including protein powder, hemp seeds and oil, supplements for humans and pets, and even high-performance textiles. The company has been listed on the Australian Stock Exchange (ASX) since March 2019.
Movement The share price lies at AU$3.20, compared to AU$1.62 on 1 April. That’s a 97.5 per cent increase.
What’s happened?
Telix Pharmaceuticals develops diagnostic and therapeutic solutions for cancer patients, based on ‘targeted radiopharmaceuticals’. Radiopharmaceuticals are a small amount of radioactive material combined with a cell-targeting molecule. The company was listed on the ASX in November 2017.
Movement The share price started the year at AU$0.65, and has now reached AU$1.50, which means it rose by 131 per cent.
Ecofibre is part of a new industry allowed in recent years by increasing legalisation of industrial hemp, making high growth possible. The company published optimistic revenue forecasts in April 2019, claiming their annual revenue would grow by 500 per cent. This was followed by an announcement in July that 525 per cent revenue growth has been achieved, which sent the share price higher. This success was primarily driven by nutraceuticals sales in the US, and a significant increase in independent pharmacies stocking its products.
What’s happened?
Future happenings
Telix is a small company handling significant risks, because their success depends on the progress of their numerous clinical trials. If all three new therapeutic programs fail, the share price is estimated to drop by as much as 70 per cent. Investors will closely watch the outcomes of current pending trials and the rate at which the market adopts Telix’s products.
Like many newly listed shares, this company is not yet returning net profits. The challenge is to keep costs moderate, while continuing to grow revenue. Regulatory changes have made this business, and they could potentially break it, if legalisation doesn’t progress or is reversed.
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Telix has shown good earnings potential, with successful clinical trials, a strong product pipeline, and increased adoption of their solutions by cancer centres internationally. The company has high expenses for research and development, because of their focus on clinical trials for new treatments. It has high staffing costs, because top talent needs to be paid adequately. Cash flow and net profit are expected to remain negative for a few years, and the rising share price is purely based on investor expectations.
Future happenings
MARKET CAPITALISATION
AUSTRALIA/NEW ZEALAND
UNITED STATES
NANO CAP
Less than AU$25 million
Less than US$50 million
MICRO CAP
AU$25 million–AU$150 million
US$50 million–US$300 million
SMALL CAP
AU$150 million–AU$1 billion
US$300 million–US$2 billion
MID CAP
AU$1 billion–AU$5 billion
US$2 billion–US$10 billion
LARGE CAP
AU$5 billion–AU$50 billion
US$10 billion–US$100 billion
MEGA CAP
Greater than AU$50 billion
Greater than US$100 billion
Past performance is not an indicator for future performance. This article is not intended to be financial advice. All prices correct as at 2 August, 2019.
Down
LARGE CAP
SMALL CAP
AMP Limited
Michael Hill International Limited
(ASX:AMP)
(ASX:MHJ)
AMP Australia offers services including insurance, investments across various asset classes, wealth advice, real-estate management, retail banking and loans. AMP Australia is a mature business in a mature market, and has been facing headwinds, such as regulatory pressure to reduce its prices.
Michael Hill owns and operates jewellery retail stores in Australia, New Zealand, and Canada. Jewellery is considered a non-essential category, so the company belongs to the ‘consumer discretionary’ sector, which is sensitive to price hikes or decreases in consumer income.
Movement
The share price fell by 45 per cent in the past 12 months and lies at AU$0.49 now.
The share price is AU$1.82, after falling 48.6 per cent over the past year.
What’s happened? In 2018, AMP in Australia was investigated by the country’s Financial Services Royal Commission. It found AMP had engaged in malpractice centring on charging fees without delivering services and putting profit before its customers. (Note, this did not apply to its NZ side of the business.) This caused an initial decline in its share price in April. Poor financial results for the year were no surprise. There was a significant drop in share price in October 2018 when AMP announced a new strategy. The share price fell again in July 2019.
Future happenings AMP shows how non-financial updates about a business can send a negative signal for investors, causing big share price movements. The need to raise capital, missed dividends, and bad publicity caused more unrest than earnings releases.
Movement
What’s happened? Diamonds are falling out of favour with many millennials, as they opt for experiences over ‘things’. Many prefer more non-traditional jewellery, with cheaper options bought online. Michael Hill has reported slow revenue growth and declining margins as competitors force it to match cut-price sale prices and the company’s own clearance sales add to the margin-crunch. This tough market environment and declining earnings per share in the past two years are undermining investor confidence.
Future happenings The company has rebranded and has an improved e-commerce strategy. They’ve cut costs and improved positioning of stores. These efforts are beginning to show results, such as 68 per cent e-commerce growth. Investors are likely monitoring the net number of new stores opened, and possible margin expansion in the future.
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Snapshot A glance at events affecting the global economy (As at 1 August unless stated otherwise)
United States Around 26 candidates from the Democratic Party announce plans to challenge President Donald Trump at the 2020 presidential election.
Canada Rising consumer confidence and a stronger economy prove a good boost for Liberal Prime Minister Justin Trudeau, ahead of October’s federal election.
United States Precious metal gold is trading at US$1,426 an ounce, the highest since April 2013. This is despite growing concerns over the US Trade War with China, tensions between Iran and the West, and Brexit.
United Kingdom Puerto Rico Thousands protest in capital San Juan, demanding Governor Ricardo Rossello resigns. He’s in the firing line for alleged corruption, plus his handling of the aftermath of hurricanes in 2017 and the island’s bankruptcy process.
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Boris Johnson becomes the new UK prime minister, taking over from Theresa May. Johnson promises to deliver Brexit.
India While parts of India are in flood, a lack of rain in other areas has been a factor in India’s economic slowdown. Economic growth reduced to 5.8 per cent from January-March, down from 6.6 per cent. Agriculture accounts for 14 per cent of the country’s economy and 42 per cent of total employment.
China China’s economic growth slumps to its lowest in nearly 30 years in the quarter ending June, as the country feels the effects of the US Trade War.
Australia
Zimbabwe
Experts say the worst appears to be over for Sydney and Melbourne property markets, with both on track for improvement.
Authorities reintroduced the Zimbabwean dollar on June 24 as the country’s legal tender, outlawing the US dollar. It’s hoped this move will stabilise the economy and help locals suffering from severe shortages of food, medicine, and fuel.
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IPOs: The Hot and Not This has been the year of tech unicorns listing on the stock exchange. CMC Markets’ Chris Smith looks at the Initial Public Offerings that have hit the market, and how they fared.
Already, it’s clear 2019 will be a significant year for Initial Public Offerings (IPOs), as several multibillion-dollar private tech companies list on the stock exchange to gain capital from public investors. Despite many of these organisations being household names – like Uber, Lyft and Airbnb – they’ve faced significant challenges around profitability. Last year 84 per cent of US tech companies that went public did so without turning a profit. This happened against a backdrop of economists predicting a recession within the next couple of years. Beyond that, some have shown impressive revenue growth, similar to Amazon and Netflix. Life as a public company will force these organisations to report quarterly earnings to the public. They’ll also have to deal with the added pressure of investor expectations around continued growth. 106 JUNO |
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Beyond Meat Inc: Hot Producer of the world’s first plant-based meat alternative burger, Beyond Meat raised just south of a quarter of a billion dollars in May. With shares skyrocketing, US company Beyond Meat is not just a top performer for 2019, but one of the most successful IPO listings in history. Pricing its initial public offering at US$25 a share, it raised over US$240 million at a valuation slightly shy of US$1.5 billion. Less than 24 hours later, its first trade was at US$46. Shares have since risen 700 per cent, now trading at US$166. Despite successfully growing revenue, Beyond Meat is yet to see a profit. But it’s expected that the substitute meat category will become a multibillion-dollar market over time, taking significant share from the US$1.4 trillion global meat market. Slack Technologies Inc: Hot Slack’s a popular provider of cloud-based tools and services assisting with workplace collaboration. It’s pool of task management applications boasts over 10 million daily users. 108 JUNO |
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The price was initially set at US$26 in June, but shares started trading at US$38.50 – before closing at US$38.62, giving the company a US$24 billion valuation. This was a big increase from the initial US$15.7 billion valuation.
valued the company at US$77billion, but it’s a significant decline from the US$120 billion some bankers predicted during last year’s funding hype. Shares are currently sitting around 4 per cent above the initial listing price.
Similar to its peers, Slack’s revenue is growing at double-digit pace – up 82 per cent in the past financial year and above US$400 million. But it’s still unprofitable, making a loss of US$140 million.
Competition in the rideshare market is heating up. Uber’s now focused on further diversifying into bike and scooter sharing, Uber Eats, Uber Freight, and exploring self driving vehicles and air transport.
Pinterest: Hot
Uber’s rival, Lyft, was the first rideshare company to list this year, in March.
The social media behemoth’s IPO offer price was set in April at US$19. On its first date it traded at US$24, then raced up to US$34.26 that same month. Shares have since levelled off to US$26.50, 36 per cent higher than the IPO price, just a few months into public life. Uber: Not Hot Rideshare company Uber was the biggest IPO of 2019 so far – in terms of both numbers and anticipation. The shares listed at US$42, 6.7 per cent below the initial offer price of US$45. It still
Lyft: Not Hot
The IPO price was listed at US$72, valuing the business at US$24 billion. The first day’s trading saw shares as high as US$87 and a positive forecast, but they’ve since trended down to US$64. That’s more than 20 per cent below the price IPO investors paid. Lyft has an estimated 30 per cent market share, operating in almost 650 cities across the United States and Canada, and also has scooter and bike hire investments. While it’s still unprofitable, Lyft has growing revenues, similar to many tech companies.
MARKET INSIGHTS
Noteworthy Kiwi IPOs in 2019 Cannasouth: Not Hot
Medicinal cannabis company Cannasouth is the newest member to the New Zealand Stock Exchange (NZX). It raised NZD$10 million in June for research and operations to further capitalise on opportunities in this growth sector.
Other IPOs on the horizon? Globally, there’s plenty of speculation this could be an unprecedented year for IPOs, while the market sits at record highs and venture capital investors want to exit some investments. The rest of 2019 could see listings from the likes of co-working business WeWork, trading application Robinhood and accommodation platform Airbnb.
The organisation had a rough start as a public company. It opened at 50c and an NZD$50 million valuation, but share prices dropped as low as 36c within the first day.
Chinese e-commerce mammoth Alibaba is strongly rumoured to expand its business by co-listing on the Hong Kong exchange, after its successful New York Stock Exchange listing.
With proposed legislation changes and a flood of companies looking to list on the stock market, cannabis has been one of this year’s hottest investment sectors. Next year’s local referendum is sure to create more interest from investors.
Saudi Arabian oil giant Aramco signalled a listing back in 2016, with a potential valuation as high as US$2 trillion. The move was ultimately delayed, reportedly due to oil prices and environmental concerns. If completed, this would be the biggest IPO in history, but reports suggest this offer may now be as far off as 2021.
There are other Kiwi companies too in the cannabis space – Hikurangi Enterprises, Helius Therapeutics, Setek Therapeutics, NUBU and Zeacann, plus hundreds offshore.
Experienced traders could consider taking their own view on these new IPO firms by buying into the disruption technologies or considering shorting them, due to their being unprofitable.
Napier Port: Watch This Space
Shorting means to sell an asset on the expectation its value will to go down, so it can be purchased again at a cheaper price.
A new, local utility company is about to enter the NZX. Set to list in late August, Napier Port is looking to raise up to NZD$234 million. It’s selling off 45 per cent of the company to the public, with Hawke’s Bay Council retaining 55 per cent ownership. Hawke’s Bay residents have first dibs in the IPO allocation of their local company, and hope to see the same success as the New Zealand-listed Port of Tauranga. The funds raised in the public offering will be partly used to fund a new 350-metre wharf, which hopes to help ease congestion and increase revenue. One concern has been the recent downward trend in log prices and China imports. With logs representing 55 per cent of exports for the port, this should be a major consideration for investors.
Otherwise, investors can just watch from a distance and stick to the proven names.
Definitions IPO: An initial public offering (IPO)
is when a private company lists on the stock exchange, offering shares to the public. This allows the company to raise capital from public investors. New Zealand Stock Exchange (NZX): The stock exchange is where shares in companies are publicly listed and traded (bought or sold). Unicorn: A startup company with a value of over $1 billion.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. SPRING 2019
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Greeks Face a Herculean Task Greece’s new government has inherited a country bogged down by financial woes. Andrew Kenningham, Chief Europe Economist for Capital Economics, explains.
Four years ago, Greece came close to being thrown out of the European Union, a disaster many people feared would trigger the collapse of the single currency itself. There were several reasons for this. Greece’s public debt was huge, at 180 per cent of Gross Domestic Product (GDP) – three times the ceiling set for a country to join the euro-zone. The economy was in free-fall. GDP shrank by 25 per cent between 2008 and 2013, and stayed there. And voters had rejected the tax increases and spending cuts the European Union insisted on for Greece to qualify for bail-out loans.
suggested that it should sell some islands to pay off its debt. In the event, the expected ‘Grexit’ didn’t happen. Instead, then-prime minister Alexis Tsipras did a U-turn and put in place the austerity policies he and the voters had previously rejected. Since then, concerns that Greece will be forced out of the euro-zone have faded. But the country still faces three huge economic challenges. Three big challenges Getting the economy growing faster is the first challenge. This will be hard. The new, centre-right government faces a backlog of reforms. These range from improving tax collection to reducing the banks’ massive number of non-performing loans. The second challenge will be to keep public finances under control. New prime minister Kyriakos Mitsotakis has promised to run a financial surplus, but he’s also to cut income, consumption and property taxes.
‘Sell off some islands’
These two promises look to be incompatible. The EU may turn a blind eye to Greece slipping on its fiscal policy this year, but it will probably stick to a fairly tough line for 2020.
German finance minister Wolfgang Schäuble said Greece should be ushered out of the union. And the German media
The third challenge is that Greece is still weighed down by far the highest public debt in the EU. SPRING 2019
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There’s a strong case for writing off more of this debt, but Germany would resist any proposal to do that. The final problem is that Greece’s membership of the single currency means that it has no independent monetary or exchange-rate policy. In other words, it can’t cut interest rates or devalue the currency to boost growth. Grexit risks reduced During the euro-zone crisis, investors were on edge about developments in Greece. This is even though it accounts for only 2 per cent of the euro-zone economy, and its trade with other euro-zone countries is trivial. This was partly because French and German banks were quite exposed to Greece. But the main reason is that investors feared a Grexit would be contagious. If the EU had refused to bail out Greece, other countries might have been forced out of the EU too. However, the risk of a break-up of the euro-zone has gone down. President of the European Central Bank (ECB) Mario Draghi said in July 2012 that the ECB would do “whatever it takes” to sustain the single currency. The bank then set up a bail-out mechanism so it could rescue any eurozone government which got into trouble. So, Greece no longer poses a threat to the euro-zone as a whole. Investment opportunities Greek government bonds have had a good run this year. Ten-year government bond yields, which determine the government’s borrowing costs, have come down from 4.4 per cent at the beginning of the year to below 2 per cent at the beginning of August. That’s close to their lowest level ever. 112 JUNO |
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There’s a good chance these government bonds will still perform well in the coming months. That’s because the ECB seems to be gearing up to buy more bonds as part of its programme of quantitative easing (QE). Greek government bonds are not eligible for inclusion in QE because the country’s credit rating’s too low. But the central bank’s purchases of bonds issued by other governments should push Greek bond yields down too. Meanwhile, the Greek share market has fallen so far since the crisis that it has little scope to fall further. It’s down by 83 per cent since January 2008. Prospects for the Greek share market depend on economic growth, which looks set to remain weak. So, we’re not expecting a big rebound in Greek equities.
Definitions Austerity policies: A set of economic policies a government implements to control public sector debt. Bond yield: The interest an investor gets from a bond. Eurozone: Countries that are part of the European Union and have the euro as their currency. Fiscal policy: Fiscal policy is the way in which a government can adjust its spending levels and tax rates to monitor and influence a country’s economy. Gross domestic product (GDP): Gross Domestic Product (GDP) is a measure of a country’s market value. It covers all
Next worry is Italy The outlook for Greece looks better than it has for a while, but there are still big concerns about the euro-zone as a whole. The new Achilles heel seems to be Italy, which has very similar problems to those Greece had in the past: a stagnant economy, huge public debt and a populist anti-EU government. But Italy’s much bigger. European taxpayers may not be keen to stump up cash to prevent its public finances from collapsing and bringing down the banks with them. The immediate future looks reasonable, thanks in large part to the central bank’s planned QE programme. But a sequel to the euro-zone crisis, this time centred on Italy, looks likely in the next five to 10 years.
goods and services produced within a timeframe and can be used to compare nations. Inflation: An increase in the price of goods and services, and a fall in the purchasing value of money. Quantitative easing: A monetary policy used by central banks and governments to stimulate their economy, often by buying government bonds and increasing the supply of money.
MARKET INSIGHTS
Do the Stars Align for Libra? Facebook’s new payments system has hit the headlines, but what does it mean for the average Kiwi, and for other currencies? Victoria Harris, of Pie Funds, investigates.
After months of speculation, Facebook has revealed it will launch a cryptocurrency, or digital money system, called Libra next year. The new Facebook ‘money’ will be a global system. Libra aims to offer users fast, simple, secure, and accessible methods of peer-to-peer payments, money transfers, and payments to retailers. Over time, Facebook’s goal is for Libra to become the world’s first mainstream cryptocurrency. The developer site says it’s to be “a simple global currency and financial infrastructure that empowers billions of people”. Libra’s targeting the 80 per cent of all global transactions that are still cash-based. It’s also targeting the 1.7 billion people – 31 per cent of the world’s population – that have no access to financial institutions.
It’s also aimed at people who do have access to banks, but want to avoid the high cost and time involved in transferring money across borders. On average, it takes about four days and costs 7 per cent of the total amount to transfer money through companies like Western Union. This initiative, if it’s successful, could be very disruptive to the world’s banking systems. Another Bitcoin? Libra is a cryptocurrency like Bitcoin, but it doesn’t have a ton in common with this famous cryptocurrency. However, they’re both virtual currencies that use computer cryptography for security. Bitcoin is valuable because it’s scarce and its price moves rapidly (up and down), so investors see it is possible to make significant profits quite quickly if they can SPRING 2019
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get it. Despite years of hype about a magical future made possible by blockchain, Bitcoin’s still basically a niche currency, not widely used for everyday transactions or even peer-to-peer payments. Libra payments will be written into a new blockchain. Blockchain’s the record-keeping technology that sits behind Bitcoin, like a digital ledger. There’ll be no ‘mining’ for Libra – you’ll basically just buy it in order to make transactions. The value of Libra will be backed by a reserve of real assets like bank deposits and short-term government securities. It will be managed by the independent Libra Association Partners, not Facebook itself. Right now, the partnership includes a diverse range of global heavyweights: Mastercard, Visa, Uber, Lyft, Spotify, eBay, and PayPal. In theory, this should stop Libra facing Bitcoin’s wild price fluctuations. Facebook’s mission is that this will be a new global currency standard (like the US dollar) but more stable and easier to exchange than Bitcoin. The list of early partners is impressive and does give me some optimism about the project. Another major benefit is that Libra will offer more value to the core Facebook platform. It will do this by reducing the risk of users simply leaving the big blue social app, and by enhancing the value of WhatsApp, Instagram, and Messenger. Libra’s crucial in Facebook’s ambition to monetise its 2.7 billion users. Another Alipay? China started the global online payment revolution with mobile payment platforms such as Alibaba’s Alipay and Tencentbacked WeChat Pay, which processed nearly US$13 trillion last year. Within WeChat (dubbed the ‘superapp’), users can message, transact, and pay bills, all without leaving the app. This creates a very stable and recurring user base. Libra could make e-commerce transactions significantly easier. However, the Libra system poses great risks to central banks globally, since it’s designed as an alternative to the existing banking system and local currencies. This differs from Alipay and WeChat Pay, which are still tied to people’s bank accounts.
Mobile money Libra has been met with a lot of criticism. Some of the backlash is over concerns about Facebook’s disregard of privacy, the security of user data, and its monopoly. Others fear a disruption of financial services. Facebook’s created a strategy to partner with many other leading businesses and to run Libra through an independent consortium. This hopefully gives it greater credibility and should help Facebook through the regulations. Libra wants to make it easy to secure your financial assets on your mobile device. Facebook believes moving money around should be as easy and cost-effective as sending a text. However, it seems unlikely Libra would make the financial system less stable, or completely replace national currencies, reducing the effectiveness of central banks’ monetary policy. It’s unlikely people will use Libra to conduct everyday domestic transactions. They’re unlikely to want to swap much of their (in most cases) riskless domestic currency for a cryptocurrency that carries some degree of risk, without being compensated for it. However, if Libra did start to be adopted widely, this could create problems for central banks, who would start to lose control of the financial system. Central banks are already starting to think about ways to give individuals cheap and fast peer-to-peer transactions while still maintaining control. Libra’s launch could just accelerate this initiative. Either way, we’re rapidly moving to a cash-less society. Libra has the potential to shake up the world’s financial system and reshape billions of people’s payment habits. But the impact may take years to emerge. Unlike many Chinese financial technology advances, which were fast-tracked by officials, this global project must clear huge regulatory hurdles and obstacles. Libra’s likely to be the first truly global digital currency. The key beneficiaries would be developing markets, which would be positive for Facebook – and the world – over time. Let’s just hope Libra provides similar attributes to its namesake star sign: balance, harmony and peace.
Definitions Bitcoin: A virtual currency invented by a group of anonymous software developers led by the fictional ‘Satoshi Nakamoto’ in 2009. They agreed rules and a system of computer-powered cryptography that meant transactions were recorded identically on ‘ledgers’ on a network of computers. Blockchain: How computers create the digital ledger needed to record the encrypted transactions using Bitcoin and other virtual currencies. It’s a system of ‘blocks’ of computer code that identify transactions and their owners. Cryptocurrency: A cryptocurrency is a digital or virtual currency that uses computer cryptography for security. Cryptography: The practice or study or writing and/or solving codes to allow for secure communication. Mining: ‘Miners’ earn a cryptocurrency by running the servers needed to do the complicated calculations for transactions on the blockchain.
Libra has the potential to shake up the world’s financial system and reshape billions of people’s payment habits, but the impact may take years to emerge.
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