By Nick Stewart | CEO & Financial Adviser
The breaking news that got everyone talking is the government's new set of measures to confront the housing crisis in New Zealand. Usually, I would've dissected the ambiguities when a significant policy change like this is announced. But this time, I'm just happy that the constant pressure by media and the public outcry finally moved the needle. This course correction is long overdue.
I'm not a fan of residential property hoarding that's been going on in this country for three decades. Anyone who has been reading this column for the past three years would know that. As a financial adviser and an advocate for diversification, I always felt a certain way about placing all resources into one asset class. It's risky.
I every so often meet people who want to improve their financial future but are also intent on steering the conversation towards residential property as the only solution.
I assume this stems from speculating with debt on capital growth without a buffer because collective wisdom says property only goes up. It's on TV; it's on the radio; it's in the newspapers and online. It seems everyone is buying it, making money from it or renovating it. The data providers want to acquire the average person's headspace, where thinking about a house's daily value is important.
Unintentionally, it has fashioned a nasty imbalance: Property-owning class vs everyone else. It tears at the egalitarian nature of New Zealand society.
It has been toxic to the collective financial wellbeing of New Zealand, created a housing crisis and pushed the debt levels to record-heights – we have the world's 8th highest household debt to GDP ratio.
Property speculation, FOMO and historic low-interest rates were prominent players in leading us to this state.
The impending residential investor clampdown is a circuit breaker for the one-track mindset people have towards residential property. It is a welcome change. Even more welcome for some investors' finances. Why?
There is a fat chance that the rent doesn't cover the outgoings with the removal of interest deductibility.
The increasing asset value cannot make that problem go away, with the bright-line test now doubled to 10 years.
Generally with a dud investment, anyone would want to cut it loose after learning an expensive lesson. Walk away and find something more suitable. But in this case, getting rid of a rental property in the future could mean writing a cheque to the IRD or, in the worst-case scenario, if the property market takes a dive, to the bank for the difference.
You must be wondering: OK Nick, what is your cristal ball saying? What is the next big investment opportunity that will reward us handsomely?
I admit to having no idea where any market will go, residential property included. Property is a necessity because we all need to put a roof over our head. But trying to get rich placing a roof over someone else's head? That's not for everyone.
Then again, Real estate investment trusts (REITs) are an alternative to buying real estate directly. REITs have been a popular investment since their creation in 1960. Think of it as a pool of real estate assets in many categories and many geographical regions traded freely on stock market exchanges. The idea of REITs is that you have exposure to real estate without actually owning, directly, the property.
As an asset class, real estate should be a part of every diversified investment portfolio. That's because real estate investments generally have a low correlation to general stocks. When stocks zig, real estate typically zags. For example, when equities suffered during the dot-com crash, REITs delivered strong returns. Over the last 36 years (1985-2020), REITs as an asset class returned 8.46% p.a, inflation-adjusted.
But, heavily focussing on one asset class always comes with a risk. REITs have suffered most due to the effect of economic shutdowns on commercial real estate.
It is important to understand diversification is important. Over time, the order of returns is random, with asset classes moving up and down the ranks. Investors should never take diversification for granted or claim it's only for those who don't know what they're doing.
Through a different lens
With most things in our life, we get a second opinion of some form or another. From purchasing a new car, changing jobs, getting a doctor's opinion, or entering into a new relationship, we want to make sure it is right for us before making a serious decision that impacts our future. In these situations, we tend to call on those we know to be wise, the professionals or experts in our life, to seek a second opinion.
But why is it that so many of us do not tend to do the same for our financial health?
All of us try to save and invest to the best of our abilities to protect our financial future. We tend to invest according to what we hear or read about or as suggested by our close family & friends, bank managers, real estate agents and sharebrokers. But none of these people think on your behalf to see if an investment suits you and your family's goals, your risk profile and your time horizon.
So all your investments are made without actually understanding why you are investing, what kind of product have you invested in and whether you will have enough money (liquidity & cash flow) when needed in the future. People need to know, "Am I OK?" Unfortunately, this question is never answered, which leaves you confused.
The best way to get an answer is to get a second opinion on your investments from a financial adviser who is a fiduciary and focuses on goal-based financial planning. It is good to do a financial fitness regimen once a year to understand your family's financial goals, cash flows requirement and documents them. This is especially so for trusts.
If you manage your situation independently or have an adviser, taking a spare hour of your time to seek a second opinion on your financial health can only give you more confidence to continue on your same path or steer you towards a better journey. So, what's to lose?
Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified, independent financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
