Merry Christmas 2015 – but sorry the investment bargains are over in Wellington

Equity and property markets are cyclical.  But they always revert to mean – an average.  In NZ, that average is 12% for equities and 8% for residential property – it has been since I entered the industry in 1967.  Therein ends the simplicity.  Finance means something different to money and money means something different to currency.  Most people only want to know about money – which really means currency, and seldom invest the time to learn about finance (which means the management of income, expenditure, investment and insurance) or economics (the social science focused on the production, consumption and transfer of wealth and its effect upon society – why we allocate and consume, as a community).

It is understandable that Joe Average is financially illiterate. There is minimal direction from government, educational institutions or families.  Politicians, school teachers or Mum and Dad.  In fact in my experience and in my opinion politicians, school teachers and Mums and Dads are part of the problem – a big part.  That’s a topic for another day.

Why at 12% for NZ shares (including dividends) and 8% for NZ property (not including rentals) are more New Zealanders not wealthy.  I’ll define some terminology first:

Finance; management of income, investments etc

Economics; allocation and reallocation of resources especially finance

Wealth; level of prosperity – poverty, necessity, comfort, luxury

Money; purchasing power (how much money you have determines your ability to purchase and at what level)

Currency; folding stuff in your wallet, purse or eftpos – what you spend

Mean reversion; the average long term return of an asset (8% residential property)

Consumption; what you spend your currency on (mostly liabilities)

To create wealth people need to be proactive – you cannot react your way to wealth.  You can have an ok life without wealth, no question – that’s not my assertion.  I’m 100% supportive of people choosing their own level of prosperity – their own purpose is their own business.  But many people desire a greater level of prosperity  but don’t behave in a way that is essential to achieving it.  In understanding more about finance and money, attitudes and behaviours change.  From my observation over many years of attempting to provide financial advice – information, application, and accountability to mutually agreed expectations generates positive outcomes.  That means taking advice from a trusted source or advisory team to plan the destination and the strategies, and manage the progress.  It’s then pretty simple to measure the results and the behaviours – to hold all accountable.

Wellingtons residential property market is off and running.  It has been for over 12 months, as most mortgage brokers will attest, however, like Auckland supply is not abundant – for quality family homes.  The media will blame, first home buyers will complain and the retired will be concerned for the inevitability of rates increases.  This is hardly unusual.  The link between financial understanding, market volatility (the surging nature of major asset classes) and wealth creation has not changed.  At least not within the capitalist system.  It’s certainly changing in India and China as their governments, markets and people adapt to less centrist intervention.  It’s the freedom of financial markets to adapt and adopt without coercion which allows business to flourish – great communities are created and serviced by great companies.  The equity market is the ‘great company market’ the measure and the barometer – capital markets are simply a collection of the best public companies.  The NZX50 – NZs top 50 companies.  The Standard and Poors 500 – US top 500 companies.  When companies are not permitted to make a profit or the owners do not have freedom of ownership, capital markets do not flourish.  It is the unpredictability through capitalism, the supply and demand dichotomy which allows patient investors the opportunity to make gains – through owning a share in a range of companies from democratically governed countries, diversified in sectors.

The domestic residential property market on the other hand has some similar drivers of performance and a number of additional ones.  Low interest rates are of benefit to both as the cost of capital to borrow is as influential for companies to grow as it is for property owners to expand – personally or for investment.  Interest rates are at an all-time low – it is no surprise therefore that both equity and residential property is at an all-time high.  The NZ residential property market also benefits from external demand – at the moment that is being exacerbated by a positive immigration ratio and a flexible ownership criteria (foreign).  As the Auckland property market became overheated pricing increased southward.  First Tauranga and Hamilton, now Wellington.  As is the norm ‘investors’ become more interested when ‘profit’  presents itself and new home owners look to join the purchasing queue as they are awakened from their slumber and unplanned strategy – suddenly they fear missing out.  They were waiting for the market to go even lower or their slowly accumulating deposit to rise inside KiwiSaver – instead of storing away cash over the last seven years, they continued to consume, on liabilities.

There is never a better time to plan for wealth creation, property ownership and investment, than now.  Perhaps the sale price of shares around the world and property in Wellington has ended – for now, it will return however and present opportunities for those with patience, discipline, and a well balanced plan.  Be ready next time.  Merry Christmas.