STOP CHEATING How tiny lies can kill your relationship
END THE SPEND Netflix could scupper your home loan
GET THAT HOUSE Buying with your friends and family
Money & Relationships Are you a team or could it all go wrong? When should we merge our money?
How to make your baby a millionaire
What to do if one partner earns more
Could you cohabit with your parents?
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Why Kiwi houses are getting smaller
How to make money out of an Airbnb
Inflation: Will you be a winner or a loser?
Turbocharge your KiwiSaver account
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PERSONAL FINANCE
The Winners and Losers of Inflation Inflation is rising rapidly but it’ll affect us all differently, says Informed Investor economist Ed McKnight. Find out if you’ll be better or worse off. Prices are rising faster in New Zealand than at any time since 1990. Like most economic events, this will create winners and losers. Some will make money. Others will lose it.
Their income and the value of their assets won’t have increased at the same rate as price increases. They are made worse off.
Here’s a summary of the main winners and losers.
Say a retiree invested NZ$100,000 into a term deposit at 2 per cent. After a year, they would receive NZ$2,000 in interest.
Winners – Borrowers When inflation is high, money loses its value. You need more money to buy the same amount of stuff.
A retiree living on the pension would then pay NZ$350 in tax, meaning their after-tax return was NZ$1,650. They then have NZ$101,650.
This devaluing of money applies both to savings and to debt. So, if you’ve borrowed money, inflation will cause the real value of that debt to decrease.
However, with inflation at 5.9 per cent, that NZ$101,650 is only worth NZ$95,987 after adjusting for inflation.
Inflation effectively transfers wealth away from savers and towards borrowers. Rising interest rates usually balance this out. The Reserve Bank typically increases the Official Cash Rate, which raises the interest rates that borrowers pay.
So, putting their money in a term deposit resulted in a loss of NZ$4,013, in real terms.
However, even with the Governor of the Reserve Bank acting against inflation, real interest rates are still negative. A borrower might pay 4 per cent interest on their mortgage, but since inflation is 5.9 per cent, their inflation-adjusted interest rate is -1.9%. That effectively means you are being paid to borrow money, in real terms. Losers – Savers Savers, on the other hand, are hammered by high inflation. That’s because their money has stayed the same, but everything has a higher price, so they can’t buy as much. Retirees who have their money squirrelled away in low-risk, low-return funds are made poorer through inflation.
Winners – Some shareholders The traditional thinking is that inflation hurts shareholder returns. However, the story is more complicated than that. Whether a business (and its shareholders) wins or loses depends on whether they can pass on the rising costs that the business faces to their customers. If a company operates in a market with low competition and loyal customers, it can pass on cost increases. This helps maintain profit margins. Similarly, if interest rates rise rapidly in response to inflation, companies with low debt will be able to ride out the inflation storm better than debt-laden companies. Losers – Some shareholders On the other hand, let’s say a company’s suppliers are increasing their prices. If that company can’t then pass on those cost increases to their consumers, profit margins will suffer. This lowers returns to shareholders. AUTUMN 2022 |
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YO U R I N V E S T I N G
The Treats Killing Your Chances of a Mortgage Got Neon, Netflix, and a subscription to Les Mills? If you’re looking for a mortgage, you might want to slash that spending, says mortgage broker Peter Norris of Catalyst.
It’s mayhem for borrowers out there. Debt-to-income ratios (DTIs), the Responsible Lending Code (CCCFA) and hiking interest rates are all causing issues for borrowers. In all honesty, it’s causing mayhem for the banks as well, because these changes to lending policy are, in a lot of cases, enforced by the regulator, and the banks are simply doing what they’re told. Let’s ignore interest rate increases for now. That’s for another day. Here’s the problem. Rigid bank lending rules – specifically due to the lending code – are being clenched to the extreme, and I believe it’s gone beyond a reasonable level. Changes to the Responsible Lending Code came into effect on 1 December, tightening the rules banks must play by when considering if you’re fit for a mortgage. This means that banks need to prove, more than ever, that the person borrowing from them can afford to. Fair enough. That seems responsible to me and, in its simplest form, I support that change. But not what’s happening now. 32 INFORMED INVESTOR |
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E X P E R T O P I N I O N | C ATA LY S T F I N A N C I A L
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Living Together: Money Apart Should you and your partner merge your money? Ben Tutty looks at the pros and cons of an issue that can lead to friction in relationships.
In the early days of my relationship with my partner, I was self-conscious about money. I chose a career as a freelance writer (and nap enthusiast) and she chose to be an accountant, so as you’d expect, she brought home a little more bacon than me. Because of my insecurity over that and because we kept our money separate, I became obsessed with paying 50 per cent of everything and devised a way to make sure I did – a gigantic spreadsheet recording all our joint spending. This sounds like a spectacularly awful idea, because that’s exactly what it was. All of a sudden, after never having a single financial disagreement, my partner and I were constantly bickering about money. What’s your spreadsheet? After a couple of years of painstakingly recording every transaction in that dreaded spreadsheet, my partner deleted the document without warning. Afterwards, we talked it over and since then we’ve barely had a single fight about our finances. This problem isn’t unique to my relationship – in fact, most couples have one niggly financial issue that tends to incite arguments. Their very own spreadsheet, if you will.
different attitudes towards money. How can we navigate these problems in a relationship to avoid a spreadsheet debacle? And when’s the right time to merge your money with your partner’s? To merge or not to merge Lynda Moore (The Money Mentalist), a financial adviser who helps couples and individuals understand and improve their relationships with money, says having joint money in a relationship isn’t essential.
Chances are many of those issues arise for similar reasons, around merging money, overspending and paying a fair share for joint expenditure.
“Merging your money isn’t something you have to do and it certainly isn’t something that you want to rush into. If it’s early in your relationship, a good place to start is to just have one joint account that you both deposit into for spending when you go out together.”
These problems might be exacerbated if one partner earns less or if a couple have
The key, according to Moore, is to start small and get to know each other’s money
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behaviours before you think about merging money. That way you can be sure that you won’t get a nasty surprise a few years down the track. Moore adds that even when you do merge your money, it’s vital that both partners still have guilt-free spending money. “One couple I spoke to had fully merged their money. She’d spend more than him and he’d get grumpy about it. “To fix the problems, we created separate spending accounts for both partners and since he couldn’t see her expenditure, he stopped caring.” With that said, Moore reckons if you want to keep your money separate that’s fine, as long as there’s trust in the relationship. “If you apply for a mortgage or a loan, chances are you’ll find out all about your partner’s financial situation anyway.
PERSONAL FINANCE
“I’ve met a lot of people who discovered during a mortgage application that their partner has a car loan or a credit card that they didn’t know about.” Different financial strokes for different folks Every couple is different and has unique priorities when it comes to money, so naturally every couple should have a different approach to how they manage their joint (or separate) finances. For example, my partner and I have no separate accounts and it’s worked fine for almost seven years now (ever since we deleted that nightmare spreadsheet). Aucklanders Jason and Abby have done the opposite, just as successfully. They’ve been together for six years, travelled, bought a house and adopted a dog – all while keeping their money separate.
“With the exception of mortgage payments our finances are completely separate. This is because we both have jobs and earn our own income and haven’t felt the need to merge money,” Jason said. Since Jason earns a bit more he typically pays for holidays and work required around the house. This way of managing money has all evolved organically, and according to Jason it’s never been a problem. Others, like Albert and Carol, a Kiwi couple living in Amsterdam, have a different, more flexible, approach. “We have independent accounts which our respective earnings are paid into, and we have a shared account, which we deposit equal amounts into, to cover things like bills, rent and other shared expenses,” Albert said.
Carol says they’re pretty relaxed and tend to take an easy-going approach to keeping things fair. “I would also add that for stuff like going out for dinner or grabbing a coffee we just alternate who pays. We don’t police it that much.” They both agree that they almost never argue about money. “Nothing’s really that hard. Other than food and travel, we’re not big spenders. Things are pretty simple because we’re so aligned.” Date nights are sacred Unlike Albert, Carol, Jason and Abby many couples struggle when figuring out how to manage their money together, and that’s fair enough. Moore says each partner brings unique ideas and priorities about money into a relationship and if they don’t align that can be tough to reconcile. “I’ve worked with a lot of couples who have an amazing relationship but really struggle with money.” Moore adds that the key to working out what’s right for you and your partner is taking it slow, talking and not allowing money worries to take over. “The most important thing is communication. If something’s on your mind, approach the topic gently with your partner and avoid getting into an argument. “Oh, and never turn a date night into a financial planning session*.” *Sorry, Barefoot Investor.
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Quieter Auction Houses and Open Homes Buyer sentiment is beginning to shift, says Rowan Dixon, acting chief executive at REINZ. He explains what’s behind the trends.
We saw a year of remarkable growth in the New Zealand property market in 2021. There was persistently strong demand which, matched with low stock levels, led to a year of records and rapid price growth across the country, with percentage increases sitting comfortably in double digits. For the three months ending December 2021, the median price for residential property across New Zealand was NZ$907,000. Change and challenge It was also a year of change and challenge. We’ve closely watched gathering headwinds and their impact on the market. Rising interest rates, the reintroduction of loan-to-value ratios (LVRs), tighter lending criteria and changes to investor taxation restrictions are starting to shift dynamics and, in December, we noted signs of a deceleration in annual price growth compared to previous months. Reports from agents around the country suggest that buyer sentiment is beginning to shift too, noting quieter auction rooms and open homes, and a decrease in firsttime buyers and investors in the market more generally. Also, they say that some buyers are less willing, and unable to pay current asking prices. 78 INFORMED INVESTOR |
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Echoing these sentiments, a survey conducted at the end of January by economist Tony Alexander in collaboration with REINZ, found that the predominant concern is no longer availability of stock, rather it is access to finance, exacerbated by changes introduced in December to the Credit Contracts and Consumer Finance Act (CCCFA) — currently under review.
means more choice, attracting more buyers and leads to more competitive pricing.
First-home buyers will be hit hardest The greatest impact will largely be felt by first-time buyers.
To stabilise house prices will require supply to meet demand.
Property prices, inflation, interest rates and lending criteria combine to make it difficult for people in this buyer segment to get their foot on the property ladder. That said, investors too will be feeling the same pressures and coping with the regulations introduced in March last year. There has been a relative increase in investors looking to sell their properties, but many are holding on to their investments as the rental market continues to thrive – as demand outweighs supply. We also experienced a long-awaited surge in new listings through November and into December. The total number of properties available for sale nationally increased 29.7 per cent annually in December — from 12,932 in 2020 to 16,773 in 2021. More properties coming on the market
Given the current appetite for property, the market remains competitive. However, if stock levels continue to increase, we may see a shift in the supply versus demand balance, alleviating upward price pressure – though following a long-term supply deficit, it may take time to really tip the scales noticeably.
Initiatives have been introduced to deliver on this, such as the bipartisan mediumdensity housing bill, but these changes will take time to effect change and bring choice. But to say all of this undermines the fact that the property market in New Zealand retains its underlying value. The REINZ House Price Index (HPI), which measures the changing value of property in the market, showed an annual percentage increase of 23.2 per cent in December – down 1.0 per cent from its peak in November. So, while we may see residential property price growth soften over the coming months, it’s wise to remember it comes off the back of a significant high. We would expect the market to slow as per the usual autumn trends. However, over the coming months, we will see if current headwinds have a further impact on the pace of growth.
EXPERT OPINION
Median House Prices Month-on-month Dec 2021
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REINZ
Northland
$760,000
Bay Of Plenty
$920,000
Auckland
$1,290,000
Gisborne
Waikato
$695,000
$850,000
Taranaki
$590,000 Mananawatu/Wanganui
Hawke’s Bay
$647,000
$820,000
Tasman
$920,000
Wellington
$1,000,000 Nelson
$830,000 Marlborough
$700,000
West Coast
$355,000
Canterbury
$680,000 Southland
$455,000 Otago
$721,000
National Median Price
Down 1.6% $905,000 AUTUMN 2022
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PROPERTY
How to Set Up an Airbnb Strict new rules on tenants are driving some property investors towards short-term rentals. Yes, they can be more profitable, says Diana Clement, but there are also fish hooks.
There’s money to be made from hosting guests in Airbnbs. And short-term guests are often a lot lighter on a property than regular tenants.
And investors sometimes buy properties or repurpose them from the long-term rental pool, furnish them and turn them into Airbnbs.
It can be lucrative. Landlords who have turned their properties into short-term rentals can double their net yield from, say, 2 per cent to 4 per cent, depending on their location, says Matthew Harris, managing director of Lighthouse Financial.
The property doesn’t need to be in a high traffic tourist location. Guests have all sorts of reasons to stay in suburbia or small towns. They might be located near an airport or a large employer.
But short-term rentals may not always be a licence to print money. Running an Airbnb is hard work. A single hair left in the bathtub between guests can lead to a negative review – and Airbnbs live or die on their reviews, says Stefan Nikolic, who runs Zodiak, a property management company just for short-term rentals. “Between stays the property must be perfect. Cleanliness is very important in terms of getting good reviews.” Your property Short-term guests can be handy for certain types of property. Airbnb hosts often let out sleepouts, baches, or other property that either isn’t permitted for long-term tenants or would otherwise be used by their family.
An example of a busy Airbnb in suburbia is this listing, “Entire residential home hosted by Andrea” in Burnside, Christchurch, near the airport. At NZ$130 a night, the home is almost always booked, says Airbnb. The median weekly rent in Burnside is NZ$493, says Tenancy Services market rent data. It’s even possible to make money with Airbnbs without actually owning the property, known as arbitrage. A tenant can rent a suitable property and then sublet it with the landlord’s permission to Airbnb guests. But if they do it without written permission, the landlord can claim back the tenant’s profit through the courts. Set it up Unless it’s a Kiwiana-style bach, short-term
rental guests often expect a high level of furnishing and amenities – and consumables such as tea, coffee, shampoo and conditioner. Between guests, these need to be replaced and the property cleaned to within an inch of its life. As for facilities, guests might just want a comfortable bed for the night. In other locations, a pool or spa might make it more appealing for a relaxing getaway or a family holiday. Regardless of whether you are renting out a bargain-basement room or top-end apartment, both communication and housekeeping need to be perfect. Sometimes it pays to outsource this. Nikolic says his clients want a totally handsfree experience, using Zodiak to arrange bookings, manage all communications, screen out undesirable clients, clean the property, remake the beds, freshen the towels, and top up the guest amenities. How to advertise Here’s the rub. The Airbnb hosts who do the best advertise across a variety of platforms including Holidayhouses.co.nz, Booking.com, Bookabach, Expedia, and often through local i-SITE offices. AUTUMN 2022
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MARKET INSIGHTS
Will Interest Rate Rises Cause a Crash? Some of the world’s biggest financial crises were sparked by the Fed raising interest rates. It’s planning rate rises, so we asked Capital Economics’ Andrew Kenningham whether we could see an economic downturn.
The US Federal Reserve is the world’s most powerful central bank. Known as the ‘Fed’, it sets monetary policy for the United States, but its actions can set unintended effects rippling throughout the world. Some the biggest financial crises in history have taken place shortly after the Fed raised interest rates, including these huge worldwide upheavals: •
The 1929 Wall Street Crash
•
The dotcom crash of 2001
•
The Global Financial Crisis (GFC).
Fed officials have made it plain they will tighten monetary policy this year, so it’s no wonder that some investors are worried. But how concerned should we be? Knock-on effects The most obvious worry is that higher interest rates in the US can directly cause problems for other countries. This is particularly true of countries which find their currencies weakening against the dollar, or which have pegged their currencies to the dollar or borrowed in dollars. These problems are more common in emerging economies – and there are fewer countries now pegging their currencies to the dollar than in the past.
Synchronised tightening cycle Another concern is that the Fed will not be the only central bank raising interest rates this year. In most countries, the rebound from the pandemic has been stronger than many people expected. That’s clearly welcome, but it’s pushed inflation up almost everywhere, and led to supply problems in countries which have been hit by the pandemic. In response, many central banks in the emerging world have already raised interest rates and a growing number in advanced economies have followed suit – including the Reserve Bank of New Zealand. So, I predict global monetary conditions will get tighter, potentially slowing the economy. Global debt at all-time high Another worry is that debt is now much higher than it was before the pandemic. The International Monetary Fund estimates that 2020 saw the largest ever one-year surge in global debt. It reached a mind-boggling $226 trillion or over 250 per cent of world gross domestic product (GDP). GDP is a measure of a country’s market value and covers all the goods and services produced over a year. AUTUMN 2022 |
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