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House Rich, Cash Poor

There’s a new class of the poor in New Zealand, says Amy Hamilton Chadwick. They’re the families with big mortgages who don’t have cash left at the end of the week.

8 October 2021

Autumn 21

It’s a strange situation when your house is worth a huge sum of money, but you’re struggling to pay for groceries.

Yet, this is a predicament which many New Zealanders find themselves in, sometimes at more than one stage of life.

Source of frustration

For first-home buyers and retirees, being ‘house rich, cash poor’ can be a significant source of frustration and stress.

“I’ve been very careful at the supermarket, and of course we haven’t been on any holidays,” says Catherine (surname withheld).

She and her husband Steve own a NZ$1.7 million home in St Heliers, near their families who help with childcare.

It’s the couple’s first home, which they bought when they returned to New Zealand after several years working abroad.

Catherine admits they spent more than they planned to on the house, then the arrival of their second child meant she needed more time off work than they had expected.

Their savings quickly dried up, cash is now tight, and the credit card statement gives her real anxiety.

“Every scrap of energy and money is already accounted for by something essential. It’s a bit of hamster wheel. We’re both working hard to bring in more money,” she says.

“But I’m not complaining. We know we’re lucky to live here and we’ve made the decision to make life harder now, in the hope that it will be easier in the future. I believe we can make it work.”

First-homers at risk

Catherine is far from alone, and in a much better position than many. With house prices surging and interest rates at record lows, first-home buyers jumped into the property market with both feet in 2020.

Those who have stretched themselves to buy will be feeling the pressure, particularly if they throw a baby or two into the mix.

“I think a lot of people will come under mortgage strain over the next 12 months,” says Hannah McQueen, director of enableMe.

“It frightens me that people commit to loans without realising how scary it feels. We see people with debt higher than six times their income, and it’s very hard for them to make true progress.

“If interest rates go up only one or two per cent, it kills you.”

Retirees in big homes

At the other end of property life cycle, retirees are sitting on homes that have skyrocketed in value over the past decade, yet their own income may be meagre.

The cost of rates, insurance and utilities on the house continue to rise as older Kiwis chip away at their retirement savings.

“I had a client who was in her early seventies. Her husband had just died, and she was complaining that she couldn’t afford to visit her daughter in Paris,” says Martin Hawes, authorised financial adviser and author.

“But she was sitting on a NZ$3 million house in Auckland. She was choosing the house over visits to her daughter.”

For retirees, there are three main options for homeowners to improve cashflow, of which the best one is downsizing, says Hawes.

It can be a tough decision to leave a long-loved family home, but clients almost always say they wish they’d done it sooner.

The other options are using the house to create an income by having a boarder or listing it on Airbnb, which works best for younger retirees.

Home equity release

Finally, as a last resort, a home equity release or ‘reverse mortgage’ can work well for people who really don’t want to move.

The equation is more complicated for first-home buyers. McQueen says being asset rich and cash poor isn’t necessarily a problem, provided you are retirement ready.

But for those who aren’t, the first course of action is what Catherine is doing: spending as little as possible and looking for ways to earn more, so you can maximise your cash surplus.

The larger the surplus, the more options you’ll have available to you.

Different mindset

Changing the behaviour and mindset can improve your cash position by up to 50 per cent, says McQueen.

“That in itself might be sufficient to fix the problem if that money can be put towards extra mortgage repayments to repay the debt fast.

“But if, after those concessions, it’s still not sufficient, because your mortgage is so high that any changes you make are inconsequential in relation to the size of your repayments, that needs to trigger some more drastic changes.”

For anyone in that situation, it feels dire – but there are ways out. Downsizing is one option, whether that’s a smaller house or a more affordable location. It could also mean renting for yourself, while investing in property.

If you really don’t want to move, McQueen says your capital gains can potentially be used to create wealth that will generate more cash in the future. It’s not a quick fix, and you’ll need to hang in there on a shoestring budget, but it might be possible.

The best approach all depends on your individual circumstances, and good financial advice could really pay off. The chronic stress of unpaid bills takes its toll; Hawes’s clients often tell him they wish they’d downsized sooner.

“Being asset rich and cash poor is a choice,” Hawes says. “You’ve chosen to do it, and you can choose to undo it.”

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