As mortgage arrears surge to pandemic-era heights, it’s time to return to the old chestnut of owning property as ‘investment’.
According to Centrix data, homeowners are falling behind on their mortgage payments at an alarming rate. Arrears climbed to 1.47% in January, escalating from 1.40% in December 2023 – that works out to almost 22,000 accounts overdue, and a whopping 16% increase year-on-year.January also saw a 4% uptick in mortgage enquiries.[i] The latest market commentary suggests that we may be facing more profound and extended financial stress in the near future.[ii]
Clearly, enough people are optimistic about their ability to pay down a mortgage, even as the cost of living crisis drags on and we see in very real time what the risks of property investment are for the average person (and the odd development company / wannabe wholesaler).
People like to wax poetic about ‘bricks and mortar’ being a safe investment. While the latest CoreLogic Pain and Gain Report shows a higher proportion of properties being resold for a gross profit (93.3% in Q4 2023, up from 92.4% in Q3 that same year), this is the first rise since Q4 2021 and still a very small gain compared to the heights of the pre-2021 years.[iii]
Volatility is normal in any investment market. But when your average person buys property for ‘investment’ purposes, they don’t usually do so as part of a balanced portfolio. All their eggs go in one basket – and that basket gets held by their mortgage lender.
Property has no liquidity. No matter whether it’s residential rental, commercial, industrial, landed based – horticultural, viticultural etc. – you are not able to draw down on this asset quickly if you get into dire straits.
When you need cash beyond the rent incoming or your bank balance, you can only leverage the equity through drawing down more debt. That’s a dangerous area to step into as it can create an unfortunate spiral where you’re borrowing from Peter to pay Paul.
I’ve said many times not to bet the farm on any one asset class, industry or even country when it comes to investing. Property is no different. It’s one thing to buy property to put a roof over your head – after all, everyone needs somewhere to live. It’s another to over-extend yourself and become a landlord to try and climb the equity ladder.
You’re also really dependent on having a good banking relationship through thick and thin if you’re taking on this kind of risk. Banks don’t want you to default as it complicates matters, but at the end of the day they are still a business looking to make their own profit from the loan... not to mention they are at much the same whims of inflation and the OCR as anyone else.
Our national obsession with property is putting people in a HODL position. HODL means “Hold On for Dear Life”, usually used when talking about volatile investments like crypto. Theoretically, it seems like a good idea – upward pressure from inflation over time means there should always be a solid return.
Alas, this is not how it goes sometimes. Ask anyone who bought property in Ireland before the 2007 housing bubble burst. It took 15 years for prices to recover and surpass what they had been, which is a long time to hold on to something and hope it’ll eventually turn a profit. Especially if you’ve put your life savings and more into it, as purchasing property often demands.
This is where the good ol’ portfolio comes in to shine. With a globally diversified, balanced investment portfolio, you can draw down cash if you need to.
While this isn’t advisable if your focus is on accumulation, life happens fast and sometimes you need that liquidity to see you through.
We recently added some new reporting functionality to our reporting. This allowed us to show our clients the accumulated amount they had drawn down, either monthly or one-off, over their investment journey. Many are already past the accumulation stage and have been regularly drawing cash to supplement their retirement lifestyle.
Some clients, when you add everything up over the decades, have taken out more than their portfolio’s current value. Quite something to see!
Drawing down from a successful investment portfolio, carefully curated over time through evidence-driven practice, is going to be less stressful than property management in dotage. You can at least avoid the headaches that come with being a landlord: fixing toilets or hot water cylinders, lease negotiations, regular insurance valuations, the risk of tenants damaging property... the list goes on.
Releasing equity in property requires resources like lawyers, bankers, valuers, various agreements, navigating changing tax legislation, resulting consulting fees and back-and-forths. Releasing equity from your portfolio can be as simple as a discussion with your financial adviser.
In any investment there are no golden tickets to the good life. However, by engaging a trusted fiduciary, you can rest assured that your long-term plan is backed by solid evidence, and that it accounts for both good times and bad in market.
You don’t need property to get ahead and remember that a property is not a financial plan. But you do need a plan and a solid investment strategy - so try sitting down with your local fiduciary to discuss or review yours.
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 and Wellington-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 349.
· 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.propertynoise.co.nz/the-number-of-kiwis-with-mortgage-arrears-hits-a-record-high/
[ii] https://www.stuff.co.nz/money/350206543/rising-mortgage-stress-sees-more-homes-sale
[iii] https://info.corelogic.co.nz/l/994732/2024-02-07/2126qx/994732/1707299260YRdroED2/2402_CoreLogic_PainandGain_Report_Q42023.pdf
