Amanda's Take Five for Tuesday

Personal Finance

House vs retirement savings; Don't quit your day job for less than NZ$3.2 m; The baby drain; DIY Supers -- coming to NZ soon?; Apps

20th Mar 12, 10:33am by Amanda Morrall

1) House vs Retirement

I'm flirting with the idea of buying a house. I like the idea of it, but dread the financial consequences of being a slave to my mortgage for 25 years. The long-term outlook is crushing, especially when you consider that home buying will come at the expense of saving for retirement. The following article from the Globe and Mail spells out the savings sacrifice younger generations of buyers will have to make for the privilege of home ownership.

2) Quitting work

I heard today from a dear old friend, a Crown prosecutor who was toying with the idea of quitting her job. Her reasons for doing make journalists look like gleeful, glass half full, optimists. I won't burst her bubble by sending her this Guardian Money article estimating how much you probably need to quit your job comfortably without going bust. The experts reckon, it'll take the equivalent of NZ$3 million. Hi-ho, hi-ho, off to work I go.

3) Baby drain

And compliments of Guardian Money again, here's another deflating yarn on the financial and emotional repercussions of having children. Not only does parenting come at the expense of personal happiness, it's financially crucifying.

Decidedly negative spin on procreation, but some interesting food for thought. The greater concern raised is how governments are going to compensate for declining birth rates when there are no tax payers to foot the bill for the crush of pensioners living into their '80s and '90s . An even greater onus for those babies that do repopulate planet earth.

4) DIY Supers

The Australians seem to have it going on in superannuation land. This article from the Sydney Morning Herald details new moves afoot to self manage superannuations schemes that are shackled to your bank account. This facility has also been able in available in other countries for awhile where you can managed your own investments (without incurring the massive brokerage fees you normally pay) through your bank account. Bring it on NZ!

5) Apps

And more technological break-thrus in Aussie to make us jealous. This blog, from Commonwealth Bank of Australia reviews five personal finance apps that are streamlining peoples' financial lives. I like the sounds of the one from the Australian Securities Commission. Mind you, we have similar wares here at interest.co.nz. Check out our extensive calculator section here.

To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter@amandamorrall

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34 Comments

by powerdownkiwi | 20th Mar 12, 11:03am 1332194595

Amanda - go see Nicole Foss. Her take is that all asset classes will drop in value, until the ponzi-bubble we all ramped up with credit, irons itself out. Seems the best tactic is to hold cash, offload your asset, and pick it back up after the drop. Meaning now is not a good time to buy - indeed the moment the spruikers start rattling their tin cups, is the very time not to.

That said, real wealth is in the real, and real estate is that. (The real isn't really real, it comes from 'royal', btw). They arent making any more of it, so having it has to be good. There's always the vulnerability of owing it's share of Local Govt debt.........

4 is just the banking sector vacuum-cleaner in action.

by SK | 20th Mar 12, 11:51am 1332197475

An average 500k house in an average suburb @ 6.5% means you are burning 32k a year of after tax dollars to just service the debt.

by SK | 20th Mar 12, 11:53am 1332197592

Which is 600 a week - 200 a room for a 3bed place.

Workable but not much fun I would imagine.

by MortgageBelt | 20th Mar 12, 12:04pm 1332198294

The sooner you buy, the sooner you have it paid off.

Buy modest, pay extra - get it paid in 15 years. Take advantage of low rates.

Don't listen to the gloomsters. They have missed out on 3 years of low rates already.

by powerdownkiwi | 20th Mar 12, 12:17pm 1332199020

Gloom is an emotion - don't bring emotions into it. You gonna guarantee those rates?

I'll tell you where they go; as defaults cascade - and they are/will - globally, so too will the risk of lending. To cover the bad 'uns, the rates will go up. The vacuum cleaner can't stop itself.

There aren't 15 years left, probably not 5. If you can't pay off very fast indeed, look at sharing an acreage between several. If it plays out as I predict, building regs will just be mass ignored, recession and needs-must will wash them away. You will have somewhere to be. If I'm wrong, your land will have appreciated in value, and you can trade. Win/win, no downside. Get caught with 10 years to run, on any mortgage, with no income.........result misery.

by steven | 20th Mar 12, 12:42pm 1332200550

Agreed....but I think 5 though.....10 is pushing it but there are not many options......

Im not sure its that much misery in a way....so you default....walk away....your credit history will be worthiness. It will be gone but then so will credit availability or its affordability at least we agree.

So if you cant get HP or another house except with cash do you care about your credit history? I see it as per building regs etc lots of rules will not be enforcable. I mean how will courts uphold /enforce lots of personal banruptcies? how will they? where do the ppl go?

Hmmm the thing is the amount of ppl who will be in this boat....30% of mortgage holders? Houses will be worth what? Nicole Foss suggested 10% of present value, in which case banks will be long gone....the bank losses will be astronomical....who will repalce them to pay to?

No income is actually an OK place to be in a way........"sorry we are evicting you from your house", so you sit on WINZ's door....go live in a tent / shack somewhere....grow your own food on any land you can find....

Historically lots of ppl, ie the poor had no voting rights so really the rich / powerful could do anything to them they wanted....can this return? In victorian times the army and navy say were infused with the upper and middle class sons who would uphold the status quo against "peasants"......bearing in mind this is no longer the case and the education level of us all is far higher etc Im not sure it can....

On an intelectual level this is fasinating....

regards

by Kate | 20th Mar 12, 1:15pm 1332202555

If it plays out as I predict, building regs will just be mass ignored, recession and needs-must will wash them away.

I think so too.

Just a bit of scenario planning - perhaps the way forward is for the unencumbered landholders (meaning those persons who own land outright) to lease land (unsubdivided land that is, i.e. not on separate title) to folks who have only a PO Box in town as a postal address. Therefore, no registration of the lease contract would exist in any land register - there might not even be any monetary payment for such lease, just an agreement to provide labour/know-how in exchange for occupation of the land.

Lessor goes and builds his/her own structure (at minimal cost 'cause it doesn't have to meet any specific regulations) on the leased land obtaining no official permits for anything - has cellphone for comms, septic tank or composting toilet, generator/solar etc for power and so on. If they want to move, they lift the place off the piles and take it with them.

Say lessor gets in trouble with debt on some other matter - no asset procedure works,because they haven't got any assets on any registers (aside perhaps from a vehicle which, I believe, one is allowed to have and keep under the NAP - although that said, I think more and more people will similarly deregister their vehicles going forward too).

Only flaw I can see is the 'dobbing in' one - but it's highly likely that all neighbours will be in much the same boat when it gets to this stage anyway. And there's always the conversion of existing structures (e.g. a barn) to a liveable/occupied one as well.

And you think that will be within 5 years, pdk? Interesting thought. Happy here to go back to basics - got the room, got the resources but need a bit more know-how and labour hours - also quite happy to see an unpermitted structure erected on my land - particularly in exchange for having someone around with that know-how.

Kind of like a dog - if you get a new one these days - you'd definitely think twice about registering it. I suppose from dog to house isn't that big a leap.

by Kate | 20th Mar 12, 2:01pm 1332205287

So the owners of the houses that have people living in their garages are being fined?

I'd love to see if that precedent has been taken.

Guess to protect yourself as the landowner, you'd want to get your occupier to put themselves on the housing corp list for a family in need of state housing. Call it fine protection insurance.

:-)

by steven | 20th Mar 12, 12:21pm 1332199305

but the gains were what? oh wait, losses in every area except central auckland which I wouldnt think of as "modest"

Also of course a factor for the risk of losses...oh wait property can only go up cant it?

yeah right.

If there is a depression, and thats very likley now then 60% losses on hosue values seem probable....so OK that house you bought for $400k is paid off in 15 years, except its only worth 200k now...

However I agree with over-paying, its what I do, the more the better....I suggest that whatever the monthly payments are, work on double or at least 50% that and pay it now....If you can afford to do that then you are financially pretty bomb proof and its the best return....clearing debt pretty much always is.

regards

by SK | 20th Mar 12, 12:10pm 1332198602

Why drop 500k on an asset you have to pay for out of after tax dollars - and every dollar you spend on it is non tax-deductable including the financing.

by neili | 20th Mar 12, 12:29pm 1332199759

$3m to retire...nonsense.....no one says your expenses have to blow out if you win Lotto. If you have no mortgage and if you don't have work costs ,eg suits & commuting , then all you need is food and utilities. Everything else is more or less a want not a need. $20k a year does it for me and I still end up saving a fair chunk of it.

by Waripori | 20th Mar 12, 12:43pm 1332200602

1.2 million would generate $63164 per annum for 60 years if you could get a 5% after tax yield. That would be plenty for most people if they did not have a mortgage. If they are older than say 40 more cash could be withdrawn as the money would not need to last as long.

Inflation is the elephant in the room. You cant just put the money into fixed interest or you can wake up one day and find your $63 000 a year no longer buys very much.

by steven | 20th Mar 12, 12:48pm 1332200913

if on the other hand you are of my view that we will see deflation, then $63k will go a long way and longer every year.....assuming the bank doesnt default and you dont loose your cash, which is most likely.

regards

by Vera Fayed | 20th Mar 12, 1:03pm 1332201832

Steven - your unyielding faith that fiat currencies are going to soon double in value relative to real stuff is the strangest thing on this board.

by powerdownkiwi | 20th Mar 12, 1:12pm 1332202334

VF - read his post carefully. Most of the 'fiat' part will implode. I'm absolutely sure that the banking model we currently have, can survive. When they shut/collapse, 'savings' in them will evaporate. Gone. Happened before, that has.

What you're left with is cash. That will go a lot further.

If you buy the deflation theory. Me, I suspect it won't be as clean-cut, not as finance-before-energy as that. I think there'l be a period where there ismore money (expectation) floating around, than necessities of life to be bought. That says a bidding war, which says inflation.

Not sure it'll matter, stress and panic will somewhat eclipse the academic appraisal of money, at that point.

by skudiv | 21st Mar 12, 7:54am 1332269673

The Romans had a very well documented collapse of a complex system. Tiny bursts of deflation, but long term inflation. The denarius ended up being worthless as the silver content was reduced to zero. Suprisingly it took 200 years to go from 99% purity to 0. Government deficit spending was the cause, and didn't create enough (if any) growth to offset the inflationary pressure of debasing the currency. There are some valuable lessons there.

by steven | 21st Mar 12, 9:08am 1332274101

You are mis-reading I think, but anyway sure you are correct there are some good lessons in that history, indeed watch Dr Joseph Tainter and the collapse of complex societies on youtube.

In brief it came back to energy, in this case they had a system of getting slaves for cheap labour and pillaging to pay their armies which wasnt sustainable energy wise......it always comes back to energy.

regards

by steven | 21st Mar 12, 9:13am 1332274419

Hmmm....yes there are a lot of unkowns, however I follow the Nicole Foss school of thought, the finance system which needs more energy every year to grow will fail first because its so leveraged....this will be a credit event. Most ppl will be close to penniless, compared to today. Think on the ppl surviving on CCs waiting for better times....when they are forced to pay those down and pretty fast there will be a huge hole....just from that.....Consider how many ppl use CCs to by food at pak'n'save....I watch them do it....even $20 worth of food....or a coffee....$5!

regards

by steven | 21st Mar 12, 9:03am 1332273806

Thats OK, for every trade there is a winner and a loser, really after 4 years where is the the sign of inflation? its nowhere....in fact core is static at 2% or even dropping towards defaltion, so from my aspect its deflation aka the Great Depression.....The biggest part of fiat is the credit/debt aspect....somehow the inflationistas such as yourself only see money in circulation as "money"...so when we print...you think there is a NET more, and this causes inflation this is what you seem to believe. This isnt the case, on two points,

1) The biggest one is the problem is 95% of the money in circulation is debt/credit, so you know printing 50% more of the existing money is a 2.5% increase overall........so printing is a small % of the total in this case...and when we look at a credit contraction, of say 10% on that 95%, its 9.5%.....v 2.5%, not far off 4 times too small....hence why when the likes of Paul Krugman say the US's stimulus was half the size it needed to be we see it didnt cause a rebound, at best a delay.

2) We are in a liquidity trap, austerity wont work, that has proven examples, again the Great Depression and the effects of 1937's austerity is clear to see in the un-employment numbers.

I will throw in a 3) Steve Keen's Minsky work....

So we have 3 really good sound economic theories in place, v not much on the other side except voodoo economics that got us into this mess...

So place your bets.

regards

by skudiv | 21st Mar 12, 7:47am 1332269239

Easy done too, if you can put that money into physical assets, which are inflation. 1.2 million worth of rental property would yeild at least 7% flation adjusted for life. Other equally valid options like farmland, forestry etc, though forestry is very low cashflow unless you sell some trees every year. 3 million would increase the standard of living for the average kiwi by an order of magnitude.

by steven | 20th Mar 12, 12:46pm 1332200794

3) OAPs in their 80s and 90s, easy, there will be few....most of them need substantial healthcare to get there....if its not available, well they wont get there.

regards

by steven | 20th Mar 12, 12:55pm 1332201305

Amanda your point of view is obsolete,

I suggest this is something you should watch,

http://www.youtube.com/watch?v=nvoFJsqF1wQ&feature=player_embedded

regards

by Ralph | 20th Mar 12, 1:22pm 1332202949

DIY Super

It might temper your enthusiasm just a little to know there are some strings attached to DIY super in Australia. Some classes of asset are not allowed (investing in your own new car for example). Also, if you do buy things like Art you aren't allowed to hang it on your wall, you have to pay to have it stored somewhere. And the audit cost is significant (and compulsory) so you have to have a bit under management or it's a big chunk of your return.

by Amanda Morrall | 20th Mar 12, 2:46pm 1332208014

I dunno. Web broker feature is a very popular and economical way of investing in Canada (through your bank) - they charge a fraction of what banks here and brokers take - something like $10 - no cap on transactions). Biggest risk is knowing what you're doing...being the usual self-harming over-reactive DIY investor.

by Ralph | 20th Mar 12, 5:59pm 1332219567

Oh I agree it's not all bad news. I've several friends in Aus doing it and there is still something to be said for doing it yourself. But let's see what the details are when they finally let it happen here, we might find you need $100K in a fund to make it economic.

by Waripori | 20th Mar 12, 4:42pm 1332214951

Inflation or deflation? Its about time scales I think. We seem to be in a deflationary phase right now as surplus manufacturing capacity, low demand and depreciated currencies of countries trying to export their way out of trouble reduce the prices of manufactures and collapsing economies reduce the values of assets ( houses) . No way of knowing how long that will last.

Long term ( and I mentioned 60 years ) you would think resource depletion would increase costs beyong the ability of technology or anything else to compensate for.

Of course the basket of goods might change and technologies not yet in place might change what we consider important now. Communications might advance to the point where no one goes anywhere so the price of petrol wont matter to anyone.

by steven | 20th Mar 12, 10:41pm 1332236481

Indeed timescales, not 60, more like 6.....to will be energy ie fossil fuels taht kick us in the pants.....technology is the appliance of energy.....but no matter how good the tech if the energy isnt available, neither will the tech be.

and yes its tending to deflationary right now.....thats pretty clear for me.....its going to get worse however i think.....

Have a look at the collapse of the soviet union, and cuba they had at one stage a 25% drop of GDP.....in fact I think cuba was even worse.

regards

by Farky | 20th Mar 12, 10:24pm 1332235490

Daer all,

When i was buying my house, (about 30 years ago) i did some sums.

How much to rent, how much are mortgage repayments and (the most important) am i going to stay in this town for at least 10 years

Answer to the last was yes.

So added 2 percent to the current mortgage rate and checked to see if the payments were less than rent.

Answer was yes. Bought house.

i now own a house. Pay nothing extra and can live on sod all because i have no outgoings

This formula isn't for people who are transient but if you intend to stay for a while mortgage payments less than rent is a good thing

by steven | 20th Mar 12, 10:35pm 1332236133

but there has been a paradym shift in energy availability....30 years ago you had a positive trend in more energy so more everything was then possible.....................what we have seen for at least a decade is a ponzi scheme of debt being used to sustain this trend when in fact without debt we would have seen a downturn far earlier....we now approach taht down at a frightening rate.....

So your house today is worth say $400k, 30 years ago what? $4k? 30 years from now what will it be worth? a lot less than $400k I think.....

regards

by Farky | 20th Mar 12, 11:56pm 1332241001

What is worth is not relevant at this point in time. I own it. I am not paying rent and don't intend to sell.

So owning in the long term is a good thing as far as i am concerned.

If i wanted to sell and buy another house it might matter,

by steven | 21st Mar 12, 7:14am 1332267245

Now though you change the argument, you seemed to be implying that it was sensible to buy based on the last 30 years, I am trying to get across the point that teh next 30 will be way different and taking out a $400k mortgage on a house that could be worth $150k in 10 years would be a financial disaster for those owner(s).....Otherwise I am in a similar boat, ie I dont think on its value, its where I live.

Buy another, well that would be relative so whether the house was worth 200k or 400k doesnt matter that much....the problem is buying (another) using debt.

regards

by Waripori | 21st Mar 12, 1:28pm 1332289689

I dont think Steven should be allowed to be on both sides of the arguement about resource depletion and inflation.

If you accept that raw materials of all kinds will get more expensive then house building costs will have to be caught up with that. There may be some reduction in land values to compensate but a fair chunk of the work of developing a section is powered by diesel and a fair bit of the rest of the cost is in local body levies which have not come down in living memory.

The value of existing homes will be held up by the rising cost of construction of new supply.There may well be a reduction in peoples ability to pay but unless we get depopulation its hard to see how house prices can collapse. As food and water look set to be as big an issue for the planet as energy New Zealand looks to be a fairly attractive prospect into the future.

Owning your own home still looks like a good idea to me.

by steven | 21st Mar 12, 1:54pm 1332291244

Im on resource depletion and deflation....for now....but these are different arguments. resource depleton is for ever.....Inflation/deflation is a transient thing, ist finance which will drive our problems for 3 to 5 years. Resource deplation comes towards the end of the decade.

So deflation now but, later once the ponzi bubble has burst and a lot of non-existant paper wealth thats is really credit/debt has disappeared then inflation seems quite probable....

Just what the landscape will look like by then is concerning.

Ok, lets disect your thoughts...ecause I think you are so wrong....but we are in unkown territory so who knows for sure.

So accept that raw materials will get more expensive.....no I dont accept that....

Its an assumption....not a given....and I think its wrong on your part.

What I expect to happen is the housing we have is what we will have for some decades. No new building, no one will have or want debt....This means the price of materials will collapse initially as we go into a depression, due to over-capacity, house values will collapse 50%~75% due to forced sales. Then the companies that supply materials will go out of business...then what little is available will be very expensive, relaitive to what you earn....not many will buy. So sure inflation is probable, but not from the prices we see today but from say 25% of that inside a decade.

An example would be a product we like....lemon juice with chili salad dressing...its got cheaper due to cancelled export orders....meaning there is excess stock....so for a while the market is flooded....later if the company goes bust I wont be able to buy it no matter what....if it doesnt well its going to have way smaller sales and I may not be able to afford it....

As an aside lets consider petrol, its price is based partially on volume ie its a commodity pricing model, as ppl like me exit cars the rich will find their petrol costs will climb signiicantly it starts to become "boutique" ....the not so rich will then be like me exiting cars....petrol in 20 years could be bill gates territory only.

It maybe hard for you to see how house prices collapse but it isnt for me...and a big collapse.

"Zealand looks to be a fairly attractive prospect into the future" now we can agree here...I think NZ as a lifeboat.....low population, large agricultural land, renewables etc....

Owning your own home with no debt having given say 33% of its present value, ie bought 20 years ago, with no mortgage yes.

regards

by Waripori | 21st Mar 12, 2:27pm 1332293262

You could be right Steven, but as a wise man said on this site a few weeks ago ( cant remember who, sorry ) even if you are right you are wrong.

If we do get the financial armageddon you are positing nothing we do now will make much difference.If we dont you will be left lamenting lost opportunity. Might as well just get on with life while being aware of the things that are most likely to occur.

Cant quite follow the petrol price thinking. Probably correct that if demand falls refining and distribution costs per unit will rise but I would have thought they will be a diminishing % of the pump price relative to increasing oil price. The medium term problem with oil price is not absolute supply it is supply relative to demand increasing in developing economies ( some of which have lots of people with high incomes who can afford higher petrol prices than we can ). I dont see total volumes through refineries falling for a while yet. Demand will fall as prices rise. Prices wont rise because demand is falling.