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What to do when you’ve given up on buying a home

Tuesday 27th June 2017

When your quarter acre dream is crushed, here’s what experts say you should do with your money instead.

 

Buying a home is a fantasy for many young people living in Auckland.

Illustration: Rachel Neser

Ever heard of the one where a 20-something-year-old buys an actual liveable house in Auckland in 2017 on an average New Zealand salary and without a $200,000 wedding gift from their dad?

Did I also mention they eat all the smashed avocado on toast they want?

With all that’s happening with the housing market and stories about what it “really” takes to get onto the property ladder, the reality for young Kiwis wanting to buy their first home has become a bit of a joke.

It would be no wonder, then, if more and more young people, sick of being told they’re worthless little shits who need to toughen up, decided that maybe owning their own house was no longer a realistic option.

House prices in Auckland average somewhere in the vicinity of $1 million, while the average national house price in April was $631,147, according to housing valuation company QV. The recently released Housing Affordability Measure, which measures the money households have left over each week after meeting housing costs, shows most renters in New Zealand could not afford to buy a house.

The average house price in Auckland has crept over $1 million.

Illustration: Rachel Neser

So is it all Netflix, fancy cars, Sunday brunches and Bali holidays for those who have decided that home ownership isn’t for them?

Sorry, not quite.

Financial adviser and Summer Kiwisaver chair Martin Hawes says all spending is a trade-off between what you have now and what you will have in the future.

For a young person, favouring the former means throwing away their greatest advantage.

“A dollar that is saved now is a lot more valuable than a dollar saved in 20 years. Time is the young person’s greatest ally,” Hawes says.

In other words: compound interest. This is where interest earned each year is added on top of the main sum of money, meaning the amount increases the longer you leave it. Therefore, a 20-year-old has a lot more time for interest to build up on their savings, meaning more money in the long-run.

Hawes says people in general should also have a range of different investments: shares, fixed interest, cash and if it still applies, listed property. Each of these different types of investments perform depending on the economic climate. Shares do well when the economy is doing well, property does well when there’s inflation and fixed interest performs when the economy goes into recession.

“Having one of each means that you have investments for all seasons,” Hawes says.

If your mind blanks when it comes to financial investments, it might be worth reading up on it - there’s plenty of online resources.

There are experts who can help too, but Hawes says due to regulations, many won’t consider taking on clients with small amounts of money. His advice here is for young people to put away money regularly to show a financial advisor or wealth or investment manager that they can save and will continue to do so into the future.

Ironically, a common suggestion made by the money gurus spoken to for this story is for young people to save as if they had a mortgage. It makes sense when you consider there’s nothing quite like a scary bank demanding its money plus interest and threatening to sell the house you’ve practically given your soul for to encourage you to save money.

Obviously then, having a pretend-mortgage requires a lot of discipline, a lack of which experts say is the root of most money mistakes.

Hannah McQueen, founder of financial advisory firm EnableMe, says if someone doesn’t have at least 20 per cent of their pay left over after expenses, then they’re not earning enough or they’re spending too much, or both.

Whatever the solution might be - whether it’s finding a new job, asking for a pay rise, spending less - McQueen says it comes down to whether a person has a definite goal to work towards.

“It’s not that [millennials] are lazy, but I think any sane person wouldn’t bother trying [to save] unless it was going to increase odds of achieving something,” she says.

“For a lot of people, just trying in isolation is not going to get them what they need. They need a strategy, a plan and a bit of gusto.”

New Zealand Federation of Family Budgeting Services chief executive Raewyn Fox says young people should also think about how to future-proof themselves for unforeseen events, like the car breaking down or being made redundant.

Being responsible and preparing for the future is all well and good, but can young people have any unadulterated fun with their money?

“The biggest reason why people come to see us is something happens in their lives, which means a change of circumstance and they can’t afford their commitments,” she says.

As well as having a rainy day fund, this could mean borrowing less money (or don’t borrow at all) or if you’re particularly concerned, taking out redundancy insurance.

BNZ head of wealth Donna Nicolof says Kiwisaver is a great vehicle for saving because the funds are locked away, meaning no sneaky little online transfer to pay for that spontaneous weekend road trip with your mates.

Importantly, though, Nicolof says young people should be investing in more aggressive Kiwisaver funds with greater growth potential so time can work its magic (that interest thing, again).

“There’s no reason why a 21-year-old should be in a conservative fund,” she says.

Being responsible and preparing for the future is all well and good, but can young people have any unadulterated fun with their money?

Nicolof says living for today and saving for the future don’t have to be mutually exclusive and it comes down to budgeting basics of understanding what money is going where and making sure you’re living within your means.

Want avocado on five-grain bread? Go for it if that’s something you love and can afford. Or maybe invite some friends over for Sunday brunch and make your own instead, she says.

Where to invest when you can't afford a home.

Illustration: Rachel Neser

Retirement Commissioner Diane Maxwell says there’s no magic formula and it’s up to the individual to decide what makes life good for them.

“The bits to cut out are the ones that are costing you money but you don’t really enjoy them: the shoes you don’t wear, food you don’t eat, the gym membership you don’t use, the third coffee you didn’t enjoy,” she says.

“Put on some music, pour a wine, park up at the kitchen table and just look at what comes in and what goes out. Don’t beat yourself up. Just ask yourself what you love the most and what you can live without.”



Join the discussion »

“exactly. As a millennial myself, who wants to retire early without a house, I thought I'd share some thoughts:

If your wanting to choose a type of mutual fund to invest in, look no further than passive index funds.

Paying a manager to run a managed mutual fund for his "expertise" and very expensive fees is not worth It. Period. For example, If your fee is 1-2%, and your average return in the fund is 4-6% (about right for growth funds) until your 65, a huge chunk of your return is being swallowed up by the manager's fees, who will give no better returns for you than an index fund.

There has been extensive studies to show that you cannot beat the market over the long term. its called the efficient market hypothesis. Don't waste your money - invest passively. Warren buffett agrees with me: https://www.forbes.com/sites/johnwasik/2017/03/01/warren-buffets-single-best-piece-of-advice/#160a6b0541b9

Index funds capture the market return as a whole, and they are far cheaper. My kiwisaver with simplicity.co.nz is 0.31% + 30/annual fee.

Compare this to most kiwisaver funds, which are around 1-2% per year + lots of hidden costs.

They are ripping you off. They are making disgusting amounts of money out of your retirement savings.

check out the bogleheads videos for more info: https://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy

/rant” — George


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Tao is a freelance business journalist currently based in Japan.
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