It’s interesting to think about the impact of increasing life expectancy on demand for investment property. Basically, the longer people expect to live the greater their ability to recover from a financial shock and the longer the payoff from investing in an asset which produces both growth and capital gain. This aspect of increasing life expectancy is probably still in its infancy but will attract more discussion in coming years. Something which has been with us and having a strengthening impact for over a quarter of a century, however, is the message to get ready for retirement.
Consider the first baby boomers born in 1946. In 1976 they were 30 and focussing on getting through oil crises, come 1986 they were 40 and getting toward peak career earning periods. But with share prices crashing in 1987 along with the property market, and governments shifting their fiscal policy planning focus from the year ahead and the electoral cycle to a ten year period at least, we started to see discussion of the cost of providing pensions for the retiring baby boomers.
Boomers prep for retirement
Very quickly from the early-1990s the message started to go out in official government campaigns and advertising by financial service providers that people needed to save money and prepare for their retirement.
Did newly fearful baby boomers start jumping into shares having seen their dreams of early retirement through share clubs of the 1980s collapse in the 1987 crash? Definitely not. Did they start ramping up cash in term deposits? No. In 1991-92 there was a huge structural adjustment in the average level of interest rates in New Zealand as inflation settled down near 2% following some painful years of the Reserve Bank getting price rises under control. Those people seeking fixed returns flocked to finance companies and we all know how that ended up terribly for so many of them.
Let’s just put it in black and white here. The clever and/or lucky ones started building up their wealth through investing in housing. They have done extremely well by ignoring anyone talking about overvalued markets, low yields, braindrain and so on.
Present day, same story
So now to the present day where we still have the message that people need to prepare for their retirement, but it is less shrill, more professionally argued, and either not a focus for young people trying to save a home deposit, or those with a house already figure KiwiSaver will take care of things for them. Plus, we have seen any party advocating raising the retirement age or cutting national superannuation getting slammed in the polls. The conclusion of people and the position of the Prime Minister and Finance Minister is that taxpayer funded super will be kept in place with approximately the same arrangements as now. The scare stories probably no longer work, especially as young and middle aged people see reports of surveys showing how very happy old people are, and how they get happier as they get older! That is not the message given from the early-1990s when the image was painted of a decrepit dystopia for all those who failed to save up money in managed funds to supplement their pension.
So what does this all mean for the housing market in the next few years?
The increasing appreciation of how happy old people are according to surveys, the high sustainability of the current national superannuation system according to our two most senior cabinet ministers, and the growing belief that KiwiSaver will take care of any extra retirement expenses, mean the incentive to save for retirement is diminished. But offsetting this is the expectation of a lengthening period being spent in retirement reliant upon non-labour income, adjustment to the very slow capital accumulation generated by investment in simple savings products, and hopefully awareness that big financial crises come along near once a decade.
The need exists for preparation for funding one’s retirement through a diversified asset portfolio containing more growth assets heading into the traditional retirement age of 65 than was the case previously. This argues in favour of both property and managed funds.
Housing investors should be careful not to become overly weighted toward property. Those favouring shares should be careful not to underestimate the cash flow benefits of continuing rental income when equity prices fall 30%-40% as they do every now and then.
What’s your ideal mix of investments and assets to prepare for retirement? Share your thoughts in the Comments section below.
Originally published in The Weekly Overview, written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are his own and do not purport to represent the views of the BNZ.