You may have seen the recent article about the shocking state of how wealth is distributed in NZ.
In summary… it ain’t great.
60% of the adult population have less than $10,000 cash in the bank
Property is the biggest investment—about 45% of the country’s wealth
Business assets accounted for 18% of overall wealth—and are limited to the top 50% of the wealthy population
It’s no wonder the common perception of investing is that it’s for the wealthy few.
“There’s not much evidence of everyone having a stake in the economy.” said Max Rashbrooke
It’s important to make sure that Millennials are represented in this conversation. Especially when it doesn’t just have an economical impact. This level of inequality has significant social impact, too.
“Concentrations of wealth may also lead to some groups having greater influence on politics than others, and to neighbourhoods becoming increasingly stratified by wealth” said Max Rashbrooke
We caught up with our mate Zoe Wallis—Chief Economist for Kiwibank (and a Millennial), who kindly shared her view on what is going on at the moment. And what we need to be thinking about.
First a bit of background…
Can you tell us a bit about yourself, and how you became an economist?
Growing up I went through many future possible career paths (including astronaut, vet, fashion designer and lawyer) but going into my final year of high school, I didn’t really have a clear direction on what I actually wanted to do after school.
I picked up economics in my final year, as I needed an extra paper, and it just really clicked with me. It was a great combination of maths, psychology and business, with tons of real-world applications.
So I went to uni and completed a commerce degree in economics and finance and then moved into my first job at the Reserve Bank of New Zealand. I quickly came to realise that you can learn all the economic models you like, but human beings aren’t rational, and financial markets don’t always act in the way that you expect.
What are the key economic trends you’re seeing at the moment?
The last ten years have been some of the craziest economic times in history. The global economy has gone through one of the worst downturns since the great depression.
We’re seeing countries move away from promoting global trade, to being more focused on looking after their own interests.
On top of that, there are big changes coming with the digital economy, the future of jobs, housing affordability, and the shape of retirement.
What are key things Millennials should be thinking about?
Consumerism has boomed in the last 50 years. We now have more choices and products than we know what to do with! It’s so easy to get caught up in the hype of buying new things—upgrading your phone every year, and making sure you have the latest flat screen TV.
However, we’re spending more and living longer. This means we’ll need more money than any other generation.
The current life expectancy for Millennials is 90 years old. This is three years longer than the baby boomers. And there’s a high risk the NZ Government superannuation scheme will go through more changes before then.
Saving and investing will be key in making sure we have the money we need to enjoy long, happy and healthy lives.
And how about what’s going on with the housing market?
We can’t talk about investing, without addressing the housing market. New Zealanders have always had a strong attraction to invest in housing. It’s seen as an easy, risk-free investment… But that’s not strictly true.
While NZ house prices only fell by around 8% on average following the global financial crisis (GFC), in other countries house prices have declined as much as 60% in a downturn.
Imagine if a year after you bought your $600,000 house, it was only worth $240,000 — that has actually happened in some cities overseas! While that example may seem pretty extreme, the point to remember is what goes up can also come back down.
There’s also the obvious risk of a natural disaster occurring and destroying your property, or a change in circumstances forcing you to sell the property at a loss.
While you can insure against some of these circumstances, it adds to the cost of ownership. Along with, rates, maintenance, and sometimes body corporate fees.
With house prices at very elevated levels (by international standards we have one of the most expensive housing markets in the world), it’s worth thinking very carefully about ‘betting it all on the house’. Particularly as mortgage rates start to increase.
Ask yourself if you can really afford the property you’re buying… And not just if you can afford it now. But how about if your plans change:
If you want to move overseas then would renting out your house cover the mortgage while you’re away?
Or if you’re wanting to have kids or start a business and want to drop to one income (or even none!) will you be able to cover the cost of your loan?
How about other investments?
So it might not be quite the right time for everyone to jump into the housing market. But that doesn’t mean you should be living hand to mouth and spending everything you earn either.
There is a world of investments out there that aren’t to do with property. Or you can indirectly gain exposure to the ups and downs of the property without putting every last drop of your savings into a house.
In NZ, the share market is often seen as highly risky. And many of our parents’ generation got burnt by the 1987 stock market crash.
But if you invested $100 in the S&P500 index in 1980, it’d be worth about $2140 now (ignoring the exchange rate). If you’d invested $100 in an NZ house over that same time, it’d be worth about $833 now. So even with the ups and downs, there are lots of potential gains to be made in the long-term.
Thanks, Zoe! 🙌
We’re planning to catch up with Zoe regularly. So if you have any questions you’d like to ask, just add a comment and we’ll bring them up in our next chat. If you want to keep a closer eye on all things economic, you can follow Zoe on twitter.