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World Cup Round Up

Let's just review the Cricket World Cup now that it is complete:

  • A murdered coach - heart attack? Strangulation? Wolfsbane? Do we live in the 21st century?
  • Overpriced tickets - the event was hosted in the Carribean but few locals got to games.
  • Empty Stadia - it looked like Sharjah for crying out loud.
  • "Banana Skin" games - and the weirdly uncompetitive Super 8 it produced.
  • Umpiring and Match refereeing -  from the fine tradition of questionable decisions to the shiny new innovation of the shambles of the final

The most astonishing thing is, that in spit of it all the result more or less reflects the playing ability of the top four sides: Australia, Sri Lanka, NZ, and South Africa. Whether you like our finishing position or not, that's a solid achievement for our side.

Friday Fun - What Happened? Regulation Happened!

The truth is I was not having much fun. The car decided to have its regular 4-monthly fit and so I wasted a good couple of hours getting that fixed. In addition to which we've been horrendously busy - which is good.

Thanks, once a gain, to the Government's best efforts to keep the consulting business interesting. After 'coupling' adviser regulation with the wider financial services review we've had 'de-coupling'. That's all you can definitively draw from the submissions and the recent press statements - so we're into the drafting process for cabinet, and then legislation.

That has proven to be a boost to our Corporate Adviser Regulation project which now has five members.

The Government Doesn't Get It, The Herald Doesn't Get It...

...but the OECD does. Sharechat produced this summary - link - which highlights the issue of discouraging the use of home purchase as saving. Which is worth having just a little pick at:

All this talk about home affordability begs the question - is saving for a home the best way to secure your future. Probably like most people, I have been solidly of the opinion that the answer, in the medium term is "yes". However, were I contemplating a purchase in today's market, I think the answer would actually be "No" and this is what the OECD is driving at, and what the New Zealand Herald doesn't understand. The article they ran today which proclaims "Average wage not sufficient to buy a house in Otara" is exhibit A. They fail even to connect up the evidence in their own story - which shows house prices accelerating away from rents - to come up with the obvious answer, which is: "don't buy one".

Let me give you a real life example from a person I met just a couple of weeks ago. He had been saving, with his partner for a house, their incomes are a bit above the average, but in this case that only serves to highlight that they too would be better off waiting before they buy:

They were renting a place for $650 a week. This property was then put on sale for $900,000. The question was - should they buy it? They possessed the means, having been saving for a home deposit over the last three years - and they'd accumulated nearly $100,000 - and have high incomes.

The interest cost for the amount they would have to borrow would be around $70,000 a year. In addition to this they would have a number of the cash costs associated with ownership - from rates to repairs. Plus the loss of the interest on their savings of about $5,500 a year. All told the weekly costs were looking like about $1,450. That's a heck of a hike up from $650.

Sure, if the housing market grows by north of 8% they will receive almost all their weekly after tax interest back in untaxed capital gain - but you can't buy groceries with it. Plus, after almost seven solid years of growth they are wise enough to know that the investment is not without market risks. In addition, as any purchaser of a leaky building will know, there are specific risks which cannot always be foreseen. They would be seriously over-weight in an asset class that looks distinctly toppy, and has zero sector or geographical diversification.

a) damn the torpedos - and buy it
b) wait and be happy with the reduced risk
c) diversify - not sure what to do - by a smaller rental to get a modest hedge against the market continuing to trek skywards for years.

After a cold hard look they decided on c). I'm with them - but they could just as easily have chosen b).


Now if you are on the average wage the differentials in rent versus purchase cost are not as great - but they are still strong. NZ property magazine shows rents only barely 4% of property value in some places. With interest rates at 8%+ that means its a no brainer. If you can't afford one yet, wait, and save the difference. Given time, the heat in the property market will dissipate, and you'll be in a great position to bargain with plenty of cash on hand - and without needing 90% of the value in debt it will be much more affordable for you.

Unless of course, you believe that house pricess can grow, after tax, much faster than inflation forever, in which case if you haven't got a house now -- you might as well start honing your skills for living on the street.

ANZ on Mortgage Commissions

The ANZ consultation process through PLAN and the NZMBA with mortgage brokers has signalled a change in levels of mortgage commissions from some lenders. It does seem like several of the main banks are yet to figure out how to have a profitable relationship with mortgage brokers. With the possible exception of ASB - which through it's Sovereign Home Loans has two distinct offers.

Interestingly in an email circulated by Bernie Cook, including an open letter to the ANZ distribution manager, Paul Munt, he mentioned "brokers that sell only on price". While it's hard to figure out causation in this picture there does seem to be a strong corelation between advisers that sell on price, and bank special offers, and - let's face it - price focused competition in home loans. Who 'started it' is, of course, irrelevant. The question is - who will end it?

If brokers are to thrice they will need to offer more than just glorified comparison shopping. Genuine advice. Product complexity is on their side - and so are international precedents. There are usually strong broker components in markets that look like ours. With increasing numbers of advisers, and increasing use of them by consumers, I would suggest that within the set of mortgage brokers there are a number of businesses effectively doing that already. Those are the ones to watch, align with, or tie in to your mortgage distribution.

If home loan providers are to thrive they need to appreciate the economic flexibility that a thriving broker market gives any canny distribution manager. To take advantage they need to segment the broker market further, work out profitable offers to the desirable segments, and focus on them. Or else have an incredibly strong direct offer.

More on Money

A reader suggested Fran O'Sullivan's article in the Weekend Herald  (link) titled 'Government Spending the Real Inflation Culprit'.

It seems to more than one or two of us that all this beating up homeowners - or even property investors - is more a question of blaming the victim. Furthermore - if its an inflation hedge you a re looking for, you can't do much better than buying a house.