Holding property does not make you wealthy. In fact, it can cost you quite a bit.
Wealth, by true definition, isn't about one's worth, but about enjoying a lifestyle of choice without worry.[i]
Many punters have underestimated the actual costs of holding a home, or had it downplayed by others who dangle the prospect of ‘being on the property ladder’ in front of them as if it were a guaranteed investment.
For many, the tried and tested mantra has been to buy the most expensive home they can afford or that the bank will allow them. And then rinse and repeat through ‘post code jumping’ from better suburb to suburb as the years progress and their increased income allows them to.
It’s the dirty secret of our national property obsession – you may ‘own’ an expensive house, but you could well be cashflow poor and ill-equipped to deal with sudden hikes in cost. For example, insurance premiums.
Over the past 10 years, home insurance has increased by 97%. Just home insurance, not contents – that’s gone up by 48% over the same period.
Consumer NZ has found that 60% of respondents were concerned about the cost of house insurance in 2024... and 8% of them didn’t renew their premiums, continuing a trend from 2023.[ii]
Evidence of non-renewals will make local councils concerned. Many of those affected by Cyclone Gabrielle who were uninsured are still in limbo 12 months on and have pushed hard for ratepayer support.[iii]
New Zealanders are battling with increases of up to 60% as insurance underwriters become increasingly leery of climate-related risks, and in some particularly quake and flood prone regions (Wellington, Marlborough) you can’t get automatic cover online anymore.[iv]
Coastal properties and alpine properties aren’t likely to be cheaper to insure anytime soon due to the harder environment. The only solution some have is to lower the sum their house is insured for, and/or to try and increase their excess.
But this means if their house burned down or washed away tomorrow, they wouldn’t be insured for the full amount. And any insurance they do receive would have a much larger chunk taken out to account for the higher excess, so that would be even less.
It’s not as bad as having no insurance, but it is still taking a big gamble that nothing bad will happen to your home until you can shore up your insurance again. The stress of that can weigh pretty heavily on your mind.
You need to make sure before buying, or even if you already own your home, that you can afford to keep up with the ongoing costs in addition to servicing your mortgage.
How do you work out how much to budget for home repairs, maintenance, and the unforeseen? You can use the 1% rule.
The 1% rule is more a rule of thumb, but it also makes sense as a rainy day fund for your home. It’s the idea that you should be putting aside 1% of your home’s value every year to cover out of pocket costs.[v]
For the sake of easy numbers: If you owned a $2m property, you would need to put aside $20k per year. This should be free and clear of savings and any mortgage repayments.
If 1% makes for uncomfortable reading, spare a thought for boat owners who have a 10% rule.[vi]
For someone relying on superannuation, or someone who has overextended themselves and bought a house outside of their means, putting aside a large chunk of change every year could be a struggle.
It sounds harsh, but – if you can’t afford this, it might be time to downsize. Your home needs to shelter you for years to come. You can’t guarantee it will do that if you can’t afford repairs, essential maintenance, and adequate insurance in case of emergency. Following the logic of the 1% rule, a more modestly-valued house in a less sought after area will be easier to hold long-term.
Keeping up with these costs in your retirement means you will need to account for them when making your financial plan. Otherwise, you risk eating away at the money meant to sustain you for decades of retirement.
It’s hard to get that back if it’s running down quicker than you have accounted for.
There are a few things you can put in place to try and get ahead of this. Firstly, keep up with your home insurance if you can. The hikes are astronomical in some cases, but it’s better than losing everything but the shirt on your back if the worst happens.
Secondly, if you are struggling you may need to sit yourself (and your partner) down for a very frank discussion about whether your property is serving you or acting as a drain on your future. Having a roof over our heads is essential, but it may make more sense to have a more humble roof long term.
And last but not least: plan, plan, plan. Make sure while you are earning that you have a robust financial plan which takes into account your unique situation, timeframe, and the lifestyle you are looking to maintain in retirement.
Having a chat with a trusted, local fiduciary for a second opinion on your financial plan can help ease your mind. After all, a burden shared is a burden halved – and talking to the experts is a great place to start.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 352.
· 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
[i] https://www.linkedin.com/pulse/what-true-wealth-christina-chua-mba-/
[ii] https://www.consumer.org.nz/services/house-and-contents-insurance/guide
[iii] https://www.rnz.co.nz/news/national/501642/gisborne-s-cyclone-buyout-scheme-to-include-uninsured-holiday-homes
[iv] https://www.rnz.co.nz/news/in-depth/513869/how-homeowners-are-responding-to-huge-insurance-premium-hikes
[v] http://www.harmonicsfinancial.ie/blog/the-1-rule-budgeting-for-home-repairs
[vi] https://www.marinedepotdirect.com/blog/boat-maintenance-statistics
