I thought you might like a bit of a read through some excerpts from the book; A History of Money by Glyn Davies.

The book runs from 9000BC to the present day discussing the story of the History of Money.

This little excerpt starts in 1934 with the “US Silver Purchase Act”.
The Act obliges the government to buy large quantities of silver. This raises its price in world markets to such an extent that China is forced off its silver standard and many other countries demonetize their silver currencies. Thus in the long run the Act reduces the demand for silver, contrary to the intention of its supporters.

*1934 German Banking Act* This establishes a national Banking Supervisory Board authorized to license every bank.

*1935 – c.1970* Continuous moderate inflation in Britain The general level of prices rises every year but at a moderate rate.

*1935 US Banking Act* The changes this makes in the Federal Reserve System have the effect of shifting power away from New York and the Federal Reserve Districts towards Washington.

1935 Reserve Bank of India begins operations India’s central bank is modelled on the Bank of England. c. 1935 Cowries still used as money in Nigeria.

*1936 France abandons the gold standard* The French government’s policy of a strong franc is undermined by competitive devaluation.

After abandoning the gold standard France continues to be the centre of a Franc bloc including most of the non-German European countries south of Scandinavia until the Second World War.

*1936 Tripartite Agreement* between Britain, France and the US on exchange rates The aim of the agreement is to stabilize exchange rates. It falls apart with the advent of the Second World War

So, some interesting times I’ll probably post more at some stage so subscribe and don’t miss a thing.

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It’s the day after  the budget and already the doom and gloom merchants are talking about the great property crash due to depreciation being removed from property investment.

Obviously this is a great topic to focus on because there is a whole lot of misunderstanding, myths and untruths about the property investment market and it is easy to make bold statements like “the property market due to crash because of the budget”…. what a load of old bollocks.

Yes there will be some people who will struggle with keeping their investment property because the ability  to claim depreciation put some money back into their pocket which allowed them to pay the mortgage. Without this injection of cash from the government these folks will not be able to maintain the mortgage and will need to sell. That’s a fact. However think about this…will the small numbers of people (and I mean relative to the overall property market) who must sell be enough to cause the Real Estate Market to tumble? I don’t think so.

Let’s look at why.

To begin with the rental market makes up approximately 34% of households in NZ with the other 66% of people owning their homes.

We also know that on average landlords have approximately 2 rental properties each, with some having many but a lot of people have dipped their toes into the water and own just 1 rental property.

So taking that little bit of info it means that statistically we can only have maximum of 17% of homeowners are landlords and the number will actually be less than that due to the great number of people who own more than 2 investment properties.

Ask yourself this question now, of the 17% of people who own the properties that people are renting, how many will now go out and sell their investment properties for less than what they paid for them?

That’s the big question….how many of you out there will sell your investment property for less than what you paid for it?

After all that’s the definition of the property market crashing, the value of the market based on what people are paying today vs what people will pay tomorrow.

Even if 100% of property investors rushed out and tried to sell their properties tomorrow the market would not crash….. not unless those investors had to sell…that’s the kicker, if the investors had to sell, i.e someone else made the decision as to what price the property was going to be sold for as the case if for mortgagee sales, then you would see the prices drop, however if 100% of the property investors went out tomorrow to sell I doubt any of them would be saying “you know what, we paid $300,000 for this property and now we are not going to get that extra $600 per annum back from the government so lets sell our property for less than what we paid for it”….can you see that happening. I didn’t think so.

What I think will happen is that some people will panic sell….. that’s not unusual, some people will do the smart thing and visit a financial adviser who can work out for them exactly what the difference will be in costs and then work out what the best strategy is with regard to holding on, putting rents up, selling now, selling later….those people will be few and far between, some people will sit and hold and put the rents up accordingly and just like in 1984 when the Aussie governement did this watch rents skyrocket because of the following.

1. There is now no benefit having a new property over an old property when it comes to depreciation.
2. With no demand for new properties the developers will not build.
3. With no new properties coming on to the market the demand for rentals will increase.
4. With increasing demand on rentals the Rent will go up quickly just like they did in Oz in 1984
5. Property prices will increase as the yields increase and property that once was not good for investment becomes viable as a property investment.
6. Developers come back into the market as the demand for new housing makes it profitable for them to build again.

Obviously this cycle will continue with ups and downs but over the long term I still see property being more expensive to buy in 2020 than it is today.

So it’s the day after the budget, don’t go out and sell your investment property unless you already were planning on selling.

Remember one thing, the reason why investors were allowed to claim deductions is because property investing is a business and as in any business it is the user who pays. In this case it is the tenant who is the user and it is the tenant who will ultimately pay.

The herald states that this budget will cost landlords $235 million next year, I think the more accurate statement would be the budget will cost Tenants $235 million next year.

Controversial commissions paid by financial institutions to investment advisers for promoting their products will be abolished voluntarily before the government regulates them, an industry body says.

Investment Savings and Insurance Association chief executive Vance Arkinstall said under a new regime investment houses, banks and superannuation funds would stop paying commissions on any investment product including KiwiSaver.

The new policy will be signed off next week, but it could be up to 18 months before the change takes effect for some.

Instead of a commission being deducted from customers’ investments, often without their full knowledge, investors would negotiate a fee directly with their adviser.

Commission-based sales by supposedly independent advisers have always been open to criticism, Mr Arkinstall said.

The above excerpt from a news article just goes to show how far from being in touch with the real world the Financial Planning fraternity is.

The real people who need financial Planning advice, you know, the ones who don’t have hundreds of thousands to invest but would like to will not be able to afford Financial Planning advice.

When this occurs they will turn to the people who will give them advice, just like they did in Australia.

Who are those people you ask?

Those are people like Blue Chip and the like, property spruikers who will tell you that an over priced, expensive property that they have just developed is the perfect solution for retirement savings.

All I can see from these new reforms are Financial Planners providing the service to already wealthy clients and every body else being left to the sharks.

Today the average house price in NZ is $350,000 compared to $6,639 in 1960.

Today the average wage in NZ is $41,000 per annum or approximately $791 per week or $19.79 per hour.

So what does this mean if you are looking at buying a house.

It means this… to buy the average house in NZ if you are on the average wage in NZ you would need to work 17,680 hours to pay for the average house.

This is almost three times more than what was required in 1960.

This is based on a 40 hour week, and not allowing for spending or taking into account interest.  This equates to 8.5 years

In 1960 the average house price was $6,639 with the hourly wage rate of $1.05 and to pay it off would take about 3 years according to Bernard Hickey of interest.co.nz.

One of our favorite funders was sent application from a father and daughter, to refinance and top up the mortgage on a home owned by the father (and to buy out his ex-wife’s share).

The father was on WINZ and needed his daughter’s support for debt servicing to work. She was in stable employment on a good income. Both had clean credit and the daughter was moving back in to live with her father.

Our friendly lender approved the loan conditional upon the daughter becoming joint owner of the property, i.e. she benefited from the transaction too.

Do you know someone looking for a loan in a similar situation?

Contact us using the contact page

Many people are asking what will happen if the proposed tax reforms are introduced and investment property does not get as many tax benefits as before.

My simple, quick and dirty answer has always been. Rents Will Rise.

The following information pulled from From the Housing NZ (Auditor General)website will provide you with a bit more of an understanding however:

Role and structure of Housing New Zealand Corporation

1.2
Housing New Zealand Corporation (the Corporation) is the entity responsible for managing state housing on behalf of the Crown.1 It provides housing to people who are unable to find suitable and sustainable accommodation through the private sector. It houses about 190,000 people, and controls an asset portfolio of more than 66,000 state houses with a value of $11,300 million. The Corporation also works to increase levels of home ownership, and has a lead role in advising the Government on housing policy.

1.3
The Corporation’s services are in high demand. As at 30 June 2005, there were 11,458 applicants on the state housing waiting list. Of these applicants, the Corporation assessed 4288 as being of high priority for state-provided housing. Although 57% of the high-priority applicants live in Auckland, only 44% of all state houses are located in Auckland. In response to this demand, the Corporation plans to increase the number of state houses by 3164 between 2005-06 and 2008-09. Most of the additional state houses will be in Auckland.

1.4
Some of the additional houses will be built by the Corporation, and some will be buildings bought or leased from private owners. The Corporation will also reconfigure some houses to make them better match the needs of applicants on its waiting list. Most state houses are made available to applicants on the general waiting list, but some are specifically for people in rural areas, and some are made available only to providers of residential

Did you get that? 11,458 applicants in 2005 !! That was the number then  so guess what it might be now!

So lets do some maths with that information.  11,458 x 2.2. people average per dwelling (thats from the last census) = 25,000 people who need housing supplied by the state.

In 2010 the figure must be even larger and I would guess there might be 30,000 people today or 13,600 extra homes that need to be built to provide just the state housing demand – almost a years building.

Now we add to this already significant problem a bunch of nuffnuts who want to punish the private sector for providing homes either directly or to the Corporation.

There is only one way for rents to go- and that is up!

Today I was asked a great question on one of the forums I write on.

It is a question that was asked via a private message so names have been removed to protect the innocent

Dear Terry

I am 21 and I’m just looking into saving up for my first house deposit.

I’m thinking about either managed funds or term deposits. I’ve been looking through the returns for balanced funds and share funds and the returns don’t look any better than 5 year term deposit rates right now. Why would I go into a fund instead?

Thanks

Bob.

This is a great question and one that probably faces many people looking at saving for their first home. Congratulations by the way on aiming to get your first home at an early age.

Here is my reply.

Hi Bob

The answer to that depends on a variety of parameters however probably the two most important would be the time frame and your risk profile.

Obviously there will be other factors such as how much you intend to contribute initially and over time.

Are you able to make regular payments or will the contributions be erratic, i.e 100 per week vs $1000 when ever you can scrape it together.

How ever back to the most important factors, time frame and risk profile.

Depending on your time frame Managed funds may not even be an option. This type of investment needs to be a medium to long term investment so at least 3 years preferably at least 5 years or more.

That may be enough to make the decision for you.

Secondly, risk profile, depending on your risk profile or the amount of risk you are willing to take (every investment, even term deposits have some form of risk) will determine what type of investment is appropriate for you.

If you are very risk adverse then term deposit will probably work better for you although many funds are available that has the same risk characteristics as term deposits.

If your risk profile is such that investment into asset classes that provide both income and capital gain are appropriate then you are able to increase the potential return.

You will notice I say potential return, this is one of the things that comes with increased risk, a potential increased return, the flip side however is a potential decreased return.

The funds you have looked at will be a certain selection of funds which sound like they have not performed that greatly as I know of many that have outperformed term deposit rates by many times over, however they are all classified as High risk funds, in other words they invest into asset classes like, shares, property, international shares and international property and they will often use internal leverage to increase the overall return to the investors.

So the answer lies in your hands. How much time do you have and what level of risk are you willing to take.

I’m happy to talk further in more detail if you like.

cheers

Terry

Over at our lending division we recently we met a couple purchasing their first home together.

As a gift from the family the couple were able to purchase at an advantageous price.

This did mean the purchase was a surprise however and so a deposit had not been saved and the young couple required 100% funding of the purchase price. (this was possible due to the equity in the property being gifted.)

Both husband and wife were self employed and had a few defaults on their credit report.

Debt servicing appeared fine based upon self-declared incomes although financials provided indicated the income declaration was reasonable.

The successful loan was approved of just over  $190,000 at 10.35% pa for a 30 year term.

Do you know anyone in a similar situation?

Let us know, we might be able to help.

This is the headline on Bernards column over at the Herald. Read it here

Usually I would just roll my eyes, chuckle at the obvious jealousy that surrounds Bernards comments and carry on with my day.

Today however the message has been continually thrust upon me via that wonderful medium twitter (you can follow me here if you like tpr2 ) in such a way that I can’t ignore the fact that a lot of the article is sensationalist and hides some deeper agenda that only Bernard knows about.

The story starts with

“John Key has just sent Generations X and Y a clear message: Leave the country now.”

Now I watched the broadcast live and I’m scratching my head with exactly where that message was, sure the speech was crappy ( I like to use french words like that occasionally) and John really needs to stop grinning when he is making statements that he obviously thinks are a bit of a con but it didn’t strike me as a message to those who are my wife’s age to bugger off to Oz.

Bernard went on to say

“younger taxpayers who are stupid/poor/unlucky enough not to own property to the websites for AirNZ, PacificBlue and Jetstar and suggested they buy one-way tickets to Australia.”

If I was a younger tax payer who did not own my own home I would be pretty miffed by Bernards assumption that I was Stupid, Poor or Unlucky. After all Property investment is not the only option out there in the world and I know plenty of very smart, very wealthy and I guess because only very lucky people can get rich, very lucky people who choose to rent while investing in other ventures.

Bernard then ranted about the rich generation….ahem.

“He decided not to challenge a generation of voters who are now rich because of the property boom and don’t want to give it up”

As someone who owns Financial Planning practices in Oz and NZ I get to meet a lot of people, real people, mums and dads, the folks who go to work, work hard and have done so for 25 , 30 and even 40 years. These are the folks that Bernard reckon are the Generation who are now Rich because of the property boom…bollocks.

These people bought their homes 30 years ago for a fraction of what it costs today, thats true but in those days it cost them a relative small fortune to own a home, not only that…have you seen those homes, not something the generation of today would choose to live in however thats what Mum and Dad did, they sacrificed all the goodies that were available to put a roof over the heads of their family.

That generation put up with 25 year mortgages and saved for 10 years to go on an overseas holiday and dreamed of owning a brand new car rather than something that was already 10 years old. That generation knew about delayed gratification.

This so called rich generation seems to be all smoke and mirrors as far as I’m concerned, unless of course Bernards definition of rich is someone who owns a home. I guess we would then be talking at cross purposes because my definition of rich is someone who does not need to work to generate sufficient income to provide his or her family with everything they need and want.

I want to know who this rich generation is?

Where are all these wealthy people?

Certainly the majority of people I meet who are trying to plan for their retirement are in this “rich generation” that Bernard talks about but strangely enough they don’t have that much money. Certainly nowhere near enough to fund a retirement and so they will end up relying on the pension to subsidise their existence.

The next bit sent me ROFLMAO , (thats roll on floor laughing my ass off  for you older rich generation folks who might not know what that meant)

He is saying all those too poor to own a home now will never be able to own their own home.

Younger Taxpayers can buy property, you just have to use the same strategies that my mum and dad used and that I used when I got into the property market. Delayed Gratification…

You see my first property was not my $1.95 million penthouse apartment in Auckland or my house at Mount Maunganui, it wasn’t the fancy apartment on the Broadwater on the Gold Coast or the house at the lake. It was a block of land because that was all I could afford. I bought that block of land and I bought it in an undesirable part of town because that was all I could afford. I paid that block of land off and built a house on it. I sold it and bought another house. I still own that house 20 years later.

My Mum and Dad taught me that strategy, they lead by example, you see their first home was not a fancy 4 bedroom house in the heart of the CBD, it wasn’t a modern state of the art piece of property 3 minutes from the city centre… it was a 40 yr old small house 10 minutes out of Cambridge… the town that has a school where both Bernard and I went (I wonder if Bernards parents used a similar strategy?)

So don’t take a swipe at this so called “Rich Generation” because John Key didn’t do enough to cause a wholesale collapse of the property market which is what Bernard has been trying to incite for years.

Take a swipe at him because if he brings in what I think he is going to bring in (something similar to what the Aussies did in 1984) then rents will go through the roof (they tripled in Sydney in 18 months).

The removal of the tax benefits that surround property will simply stop people becoming landlords. Great the uninitiated say because then property won’t go up in value and we can afford to buy ourselves.

I’m sorry but thats a long slow road and in the mean time no one is building new homes to house our growing population, after all why would a developer build something he can’t make any money on.

So no new buildings, a growing population, increasing demand on the existing housing stock and the only people left around to provide rental accommodation are the current landlords who have just had significant tax benefits removed from their investments….yep thats a recipe for rents coming down…not!

Remember that 1/3rd of kiwis rent. For most landlords, even with the tax benefits, they have to pay something each and every week to pay for that property. In other words the landlords are subsidising the tenant in most cases especially in the bigger cities. The long term benefit is that they pay that property off, it gains in value and they have a nice little stash for retirement. that seems fair to me.

For example a landlord on 70k per annum would need to pay approximately $170 a week towards a 4 bedroom brick and tile property in Tauranga if the tenant was paying $350 per week.

Yes, at the end of 25 years the landlord has paid the property off but he has still subsidised the tenants along the way.

I would ask all of you who support Bernards view, Why do you want to own your own home?

Could it be because you see it as a way of becoming wealthier over the long term? Could it be that the very things you say are atrocious and outrageous now are the exact things you want the moment you hop onto the property ladder.

Could it be that once you are a home owner or a landlord you might change your mind about supporting Bernards article?