Property prosperity and interest rates

The NZ Herald recently ran an interesting article about a young lady from Auckland, who despite the stories of housing un-affordability has, at the age of just 24, managed to own a property in Auckland and a bach in Pauanui (a swanky beach resort on the Coromandel coast).

How did she do that? “…it wasn’t having rich parents that got her there – she’s worked since she was 13, sacrificed nights out and saved like crazy.”

The back story is interesting, but essentially it comes down to a strong work ethic, and a commitment to saving.

“At age 16, Mrs Verheul worked at an after-school care centre five days a week… When she started studying business management at AUT University she also worked before-school shifts and took on other jobs that fitted into her schedule including data entry for a transport company.”

She said her grandmother taught her how to budget and she had a unique way of deciding what her necessities were: “First you work out what it costs for all your needs…Once you have calculated your basic needs, you decide how much you ideally want or need to save…Then what ever is left over after that is left for food. Cereal bread and milk doesn’t cost the world, and neither does a can of tuna or a bag of rice.”
The other important thing is she took control of her husband’s spending! “He only has a bit of spending money on his card for buying a cold drink on a hot day… otherwise he just can’t help himself but swipe away on things he doesn’t need like bakery food and energy drinks. When we first got serious I went through his bank statements and added up that he had spent over $60 that week on just on bits and pieces from the dairy and bakery.”

There you go – hard work, commitment, frugal living, and controlling your partner’s spending (!), is a great way to get a step up on the property ladder. Of course, the young lady with two steps on the property ladder is an exception. Most people are not prepared to make the lifestyle choice required.

If you really want to accumulate life-changing wealth, there are actually three areas to focus on: making money (having a highly paid job or multiple incomes: more than one job or starting a business), saving it (putting savings ahead of spending), and investing wisely (like buying bricks and mortar rather than Lotto tickets).

While I accept houses cost more than they should (due to restrictive planning laws, over regulation of the building industry, and local council fees), those who are determined to own a property can if they take ownership of the problem first.

One thing property buyers do have in their favour at present is low interest rates. Last week the Governor of the Reserve Bank left the Official Cash Rate unchanged at 2.25%.

Graeme Wheeler said, “There are many uncertainties around the outlook. Internationally, these relate to the prospects for global growth, particularly around China, and the outlook for global financial markets. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.”

Most economists are picking the OCR to fall to 2% either in June or August. Ipredict has the odds of a 25 point decline on 9 June at 69% (and 31% for no change). Given that outlook, there is unlikely to be much change in bank mortgage rates over the next couple of months or more. This is great news for those coming off fixed rates and refixing in the new historically low interest rate environment.

Meanwhile across the Tasman, the Reserve Bank of Australia has reduced their Official Cash Rate by 25 points to 1.75% (the first change since May last year). That shows the Australian economy has some way to go before it emerges from the effects of a slowing China. China does loom large in the minds of market watchers. Opinion is equally divided as to whether their economy is in for a soft landing or whether it will be the greatest economic collapse ever seen. One’s view on that seems to depend on how much faith one has in governments to manage boom and bust cycles.

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