NZ Herald 10 August 2024

ADid you see last week’s column, in which a wealthy (but, by the way, not very happy) reader said, “I grew up in poverty (lots of love), the kind of poverty where my mother had to decide whether she purchased shoes for winter to get to her cleaning job at 5am or school shoes for me in winter. The only meaningful measure I have to show that I’ve done okay is that I can buy any shoe at any time.”

That seems a good definition of being comfortably off — when you can buy relatively inexpensive things without thinking about the money. And when, if the car breaks down or you get a parking fine, it’s annoying but not financially worrying. And when someone proposes a fun weekend away, you don’t hesitate because of the cost.

So let’s get you to that point. Funnily enough, right now — and again some time in the next few months — there are two opportunities to start painlessly building up your financial strength that should enable you to relax about money.

The first opportunity is to save your tax cuts, which came into effect on July 31. Let’s say you earn $80,000 a year before tax. The tax calculator on budget.govt.nz tells us that you’ll get just over $40 a fortnight more.

I suggest you set up an automatic fortnightly transfer of that amount, the day after your pay goes into your bank account. Move it into a bank account that earns higher interest, or a conservative non-KiwiSaver account.

If you earn an average 3 per cent a year, after tax and any fees, your money will grow to about $10,400 in ten years, according to the Savings Calculator on sorted.org.nz. Want it to grow faster? Add an extra $10 or $20 a fortnight. Surely you won’t miss a dollar or so a day. And any time you get a pay rise, add a bit more.

After you’ve built up whatever amount lets you stop worrying about money, I suggest you change the transfer to your KiwiSaver account — which I assume you have. If not, change that!

Adding extra to KiwiSaver makes a huge difference over time. For example, someone earning $80,000 who saves $40 extra a fortnight in a conservative KiwiSaver fund over 20 years will have about $53,000 extra for retirement. And in a growth fund it will be more like $66,000.

For the young, the numbers over 40 years are $141,000 in a conservative fund and $225,000 — not far off quarter of a million dollars — in a growth fund.

And for people who are not in KiwiSaver, or not contributing, there’s a bonus. While others have already got their government contributions, you will also receive that money, pushing up your total savings.

To get your own numbers, with whatever tax cut you get, use the KiwiSaver Calculator on sorted.org.nz. Note that the retirement totals in that calculator are adjusted for inflation. If you want to see the raw dollars, switch off the inflation adjustment.

The second way to build your financial strength painlessly applies to everyone with a mortgage. With interest rates falling, when your mortgage term ends, your regular payments will decrease. The trick is to pretend that didn’t happen. Tell your lender you want to continue to pay the old amount. This brings amazing results.

Let’s say you have a $500,000 30-year mortgage, and your interest rate has been 7.5 per cent. You’ll be paying $1,613 a fortnight.

If the interest rate drops to 6.5 per cent, you’ll pay $1,458 a fortnight. But if you stick with the old $1,613 a fortnight, the total interest you will pay drops hugely, and your mortgage will end seven years earlier. That’s big. You could start doing more serious retirement saving, and worrying less, when you’re a lot younger. Use sorted.org.nz’s mortgage calculator to get your numbers.

What’s more, you’ll increase your security considerably. If you’ve been paying extra off your mortgage and then have a financial crisis — such as losing your job, or needing a large sum — your lender is much more likely to give you a break on your payments, or let you borrow more.

I hope many readers will take these two steps, although some people will need every penny of their tax cuts and reduced mortgage payments just to get by. Fair enough — if you really do.

Others might say I’m being a spoil sport. Okay, keep a wee bit of your tax cut and mortgage reduction to spend on fun. But if you follow the suggestions with most of the money, you’ll have more fun and less money anxiety in the long run.

AThere’s no big difference for people over 65. But KiwiSaver funds tend to charge lower fees, and are perhaps under closer scrutiny by regulators. So you might as well stay put.

ANobody ever really knows where house prices will go. True, mortgage interest rates are falling, and that affects prices. But prices also depend on changes in the supply of houses, the pace of immigration, and the economy in general.

Underlying all that is the fact that house prices relative to incomes are still ridiculous! And those are the most meaningful numbers. If prices rise fast but so do incomes, the same proportion of people can afford to buy homes. But that’s not what’s happened, as our graph shows.

Back in the sixties, seventies and eighties the average house cost two or three times the average household income, says economist Shamubeel Eaqub.

But since then the ratio has risen at an increasing pace, to a peak of 10.4 in December 2021. It has dropped back to 7.9 now, but that’s still way out of line compared to most developed countries.

So what will happen next? Eaqub says he doesn’t do forecasts. However, “my working assumption is no change in prices this year (lower interest rates later this year, but recession and job losses to weigh on house sales and prices). Then some rebound in prices because of a construction slump, meaning we will be undersupplied again. But expect house prices to remain at similar multiple of incomes.”

He notes that the Reserve Bank has forecast 2.3 per cent house price growth this year, 5.4 per cent next year, and 5.8 per cent in 2026 — while wages are forecast to grow 2.9 per cent, 3.3 per cent and 3.4 per cent in those three years. If those numbers turn out to be correct, the house price to income ratio will fall a bit this year and rise a bit in the next two years.

Where does that leave you? Perhaps waiting, on the assumption that prices will, in fact, rise. But economic forecasts are notoriously tricky, and often end up wrong. And they don’t apply to every corner of the market. Meanwhile, you would be watching anxiously, and never knowing when is the right time to make the move.

You also need to take into account, as you point out, the saving on not making mortgage payments if you sell soon. That adds up.

If I were you, I would put the rental up for sale this spring — once we’re past the winter real estate doldrums. But don’t sell if for a song. You’re not in a rush. If it doesn’t sell in a few months, take it off the market and try again, perhaps a year later. But it would be good to get this over with sooner rather than later, so you can get on with your lives.

One other point: I suggest you tell your tenants in advance that you plan to sell the house, and charge them considerably lower rent while it’s on the market. Not only is that the decent thing to do, but it increases your chances of keeping them. If they leave, it would probably be hard to find replacements.

By the way, I assume you’ve owned the house for more than two years, so the bright line rule — about taxing your gains on the house — won’t apply.

AA great tip, especially for retired people who are often more flexible than others about when they can travel. There may be similar situations with other airlines too.

August is Money Month, as outlined on the Te Ara Ahunga Ora Retirement Commission’s website sorted.org.nz.

The website page starts with a fun bit about excuses not to get your money sorted. But then it gets down to business, listing all sorts of resources, tools, webinars, and free events around the country. Some are aimed at people at particular stages in life. It’s a good opportunity to make progress with your money.