Friday, September 6, 2013

Frank Newman: Frugality and home ownership

Virtually every day I see news items reporting a tale of woe about unfortunate wannabe first home buyers being deprived of the right to do so; and it’s always someone else’s fault. I personally don’t buy into that negativity and blame game. In my view houses are affordable, and more so in provincial New Zealand.

I addressed this issue in a recent column about living off the smell of an oily rag. People usually have a bit of a chuckle about frugality and dismiss it a little like they would buying a black and white TV – it was something a previous generation did, before cell phones were invented and before Facebook (Fb) joined the Periodic Table of Elements.
News flash! Frugality is a pathway to buying your first home and first, and second, and third investment property. It’s not the only pathway but it is low-risk and certain to achieve the objective.

If I were to express as a single word the difference between those who are able to buy their own home and those who are not, it would be attitude. I know that’s general to too trite to be true in all cases, and there are situations where some people are not able to achieve stable housing without state assistance. This is where politicians could help. In all other cases they should largely get out of the way in my view.

Attitude comes down to five things.

The first is commitment. Start saving early and often. As a general rule of thumb that 10 cents in every dollar that flows through your pocket (and bank account) should be captured and caged. By captured I mean saved, and by caged I mean put to work in an investment account of some kind. If the person on the average wage did that during their life-time then by the time they are of an age to receive super’ they will have more money than they would have ever have imaged when they made that first deposit into their savings account. That’s not an exaggeration, it’s just how the numbers work - and compounding interest really is just as simple as 1, 2, 4, 8, 16….

Commitment also means giving up some of the nice things so you can have the important things. Having a flash car to look good is an act of stupidity in my view. Just remember a mortgage repayment will have life-time benefits. A car on the other hand is a liability with diminishing resale value and increasing annual costs.

The second key word is KiwiSaver. There are huge benefits to be had for those who have yet to buy their own home. Literally there are thousands of free dollars waiting for you to grab and use as a deposit on your first home. One would need to have cup-cakes in their head to not take advantage of it! KiwiSaver has been well covered previously in Property Plus.

The third key word is time. Use it productively. Turn off the tellie and use that time to generate some extra income or use it to save money by putting in a vege garden or doing some other money-saving activity. If you have a particular hobby, try to turn it into a positive cash flow. Time is also about having a date in mind when you want to buy your first (or next) home. Defining a time frame creates an imperative that turns it into a goal, rather than a day dream.

That leads onto the fourth key word, which is mind-set. Don’t expect anyone else to do things for you. If you want something it’s up to you to get it. As much as you or others may wish it, the government will not give you a house. Unfortunately there is a perception that it will, which tends to make people stand in a queue with their hands out, while the rest of the world passes you by. If you want something, you should be prepared to give something up to get it. Figure out what is least important to you and give that up first.
The fifth key word is humility. A first home need not be the Kings’ palace. The important thing is to get on the property escalator. A humble abode in a nice street is likely to turn into a tidy investment.

There are a lot more words that could be said about home ownership but these pretty much sum it up: commitment, KiwiSaver, time, mind-set, and humility.


Irene said...
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Thanks for the article and generally I agree. However, the current situation in central Auckland makes it extremely difficult for young people (even those tertiary qualified and with savings)to get a reasonable foothold on the property ladder. This is not the fault of individuals seeking to obtain a home, they are merely suffering the collateral damage of a localised property bubble.

Brian said...
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Good Advice. Frank
I will take a bet that all three Labor hopefuls would avoid these five axioms like the plague.

Actually they work, my wife and I took 10 years to save for a farm, no financial help. Except we had one objective and drive to accomplish the task. On the way to farm ownership we paid back our loan for stock in four years instead of five. Paid back the farm mortgage well before the due date. That is credit in the Bank.

I have one query Frank, having never used Kiwisaver but on the face of it looks like an excellent method. BUT I have a reservation, "Any method of savings through a Government scheme" would or is, open to the major thief INFLATION.


Simply put our inflation, low as it SEEMS is the silent killer. It is the criminal that all Political Parties avoid, rather than face.
That is my onr reservation in today's world, find a safe "fund" or "investment" which compensates for inflation.

This is why sensible people do not take Political promises at their face value; but in today's N.Z. buy property as a hedge against the real enemy of us all. INFLATION.

Mike Bradstock said...
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This sounds like the glib reasoning of one who has no real experience of poverty and other difficulties. How about moving on to specifics, Frank. For your next article, showing us your budget whereby, say, a family of two adults and two children can save and work up the deposit for a house on the minimum wage? If you like, make it 50% more than the minimum wage. Even double it. Show us your budget line for irregular, largely unforeseeable expenses like medical expenses. Show us how long it will take to save a deposit by setting aside 10% of the minimum wage. I look forward to being shown how easy it is with a little will power.

David Cooper said...
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Mike I think you miss the point totally when you say to frank show me on paper how you save for a deposit.Real poverty does not exist in NZ we all start with equal opportunities.
So how do we get a home?
First don't wait until you are married with two children, start the day you are able to get a weekend or after school job and start saving. Anybody who is on a minimum wage married with two children is just plain stupid and doesn't deserve help from the taxpayer.
Second Don't fritter away your income on non essentilas such as cars,weekend whinging get togethers drinking Lattes with people in the same situation.
Thirdly start off with modest aspirations and grow from there. By the time I was married at 23 we had our own two bedroom, one bathroom, no garage shingle drive way home by working two jobs seven days a week and going to University in the evenings. The only thing you need on paper is a plan and stick to it


Anonymous said...
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Good article Frank and so true.
One point though -
My father followed all your advice and purchased a property early in the piece. What was damning for him was rates. When the New Zealand government in its wisdom (?) changed from what you paid to what (they) decided a property was worth they virtually forced him out of his very modest home. A great money making scheme for government; but crippling on homeowners.
The local mayor who failed to appreciate these situations quiped first -
'These people should not own a house'.
Secondly he publicly retorted
'The price of living in paradise'.
By changing the method or rating properties genuine home buyers were heavily penalised. Local councils failed to grasp this. Soaring property values have ham strung so many people. Sure they make money for councils; but at the cost of the genuine home owner.

At the same time services provided diminished. This is not just a local concern; but a national one since numerous national governments have mandated so much onto local government -eg. water quality, rubbish disposal, roading

The solution, I experienced in the US was keeping property taxes(rates) at the amount you paid for a property plus 5%.
Local body and national politicians are unable to grasp this difference. Property values may increase; BUT these values are not realised until a property is sold.
This is the difference between a genuine homeowner and a speculator.

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